Impairment of Right-of-Use Assets – Recognition and Measurement under ASC 842 and IFRS 16

A right-of-use (ROU) asset represents a lessee’s right to use a leased asset over the lease term. Like other non-financial assets, ROU assets are subject to impairment when indicators suggest that their carrying amount may not be recoverable. Both U.S. GAAP (ASC 842 and ASC 360) and IFRS (IFRS 16 and IAS 36) require lessees to apply impairment rules consistent with other long-lived assets.

This article explains how to identify impairment triggers, perform impairment testing, and recognize impairment losses on ROU assets.

1. When Is a ROU Asset Subject to Impairment?

A ROU asset must be assessed for impairment when indicators exist that the asset may no longer be recoverable.

Common impairment indicators:

✦ Significant decline in asset value

✦ Adverse changes in market or use

✦ Leasehold abandonment or early termination

✦ Sublease income shortfalls

✦ Poor operating performance of the leased facility

Under both GAAP and IFRS, impairment testing only applies to the ROU asset, not the lease liability.

2. Impairment under U.S. GAAP (ASC 360)

Lessees apply the two-step model in ASC 360:

Step 1: Recoverability Test

✦ Compare undiscounted future cash flows from use of the asset to its carrying amount

✦ If cash flows < carrying amount → proceed to Step 2

Step 2: Measurement of Impairment Loss

✦ Impairment loss = Carrying amount – Fair value of the ROU asset

Example: ✦ Carrying amount = $250,000 ✦ Undiscounted cash flows = $200,000 → fails Step 1 ✦ Fair value = $180,000 ✦ Impairment loss = $70,000

Journal entry: Dr. Impairment Loss – $70,000 / Cr. ROU Asset – $70,000.

3. Impairment under IFRS (IAS 36)

IFRS uses a one-step model:

✦ Compare carrying amount to recoverable amount

✦ Recoverable amount = higher of:➝ Fair value less costs of disposal➝ Value in use (discounted future cash flows)

If the recoverable amount is lower than the carrying amount, recognize an impairment loss.

Dr. Impairment Loss – $70,000 / Cr. ROU Asset – $70,000.

IFRS allows impairment reversal in future periods (unless related to goodwill), which is not permitted under U.S. GAAP.

4. Subsequent Accounting after Impairment

After recognizing impairment:

✦ Depreciate the new carrying amount of the ROU asset over the remaining lease term

✦ Do not adjust the lease liability

✦ Do not reverse impairment under U.S. GAAP

✦ Under IFRS, reversal is allowed if conditions improve

Revised depreciation: ✦ Remaining ROU asset = $180,000 ✦ Remaining lease term = 3 years ✦ New annual depreciation = $60,000/year

5. Impact on Financial Statements

Impairment affects:

✦ Income statement: immediate recognition of loss

✦ Balance sheet: reduced ROU asset

✦ Future periods: lower depreciation expense, unchanged lease liability

Presentation example: “ROU assets decreased by $70,000 due to an impairment charge recognized in Q2, following the closure of underperforming retail locations.”

6. Disclosure Requirements

Disclose:

✦ Nature and amount of impairment loss

✦ Events leading to impairment

✦ Methods used to determine recoverable amount

✦ For IFRS: whether any impairment reversal occurred

Disclosure example: “The Company recognized a $1.3 million impairment loss on ROU assets related to office leases in a discontinued segment. Recoverable amounts were determined based on fair value less costs to dispose.”