In the case of a product line or regional business, the company needs to identify the fair value of the lowest group of assets to which a cash flow value may be assigned. Additionally, if the lowest level of identifiable cash flows is for a product line or region of the business, you must analyze the costs directly related to the product line or region. For some, these impacts were felt before the end of the first quarter and for others, it may have taken longer. However, assessing recoverability is not as black and white. Recoverability requires evaluating if the undiscounted future cash flows generated from the use of an asset (or asset group) is estimated to equal or exceed the recorded amount (i.e. An individual asset cannot be reviewed for recoverability if it is not able to generate cash inflow independently of other assets, and therefore a CGU is the lowest level at which cash inflows are generated. The recoverable amount is defined as the higher of (1) fair value of the asset (or asset group) less costs of disposal or (2) the VIU, equalling the expected future cash flows of the asset (or asset group) discounted to their present value. An organization’s first responsibility is to be aware of potential impairment indicators, which occur when the carrying value of an asset may need to be permanently decreased in comparison to its fair value or recoverable amount. Basically, a payment of key money in this context should become a part of the right of use (ROU) asset, which will then be amortized over the term of the lease. Download the guide Leases Our Leases guide addresses the accounting for leases under US GAAP. The company also needs to use judgment in determining the expected future cash flows and the appropriate discount rate. When this occurs, the carrying value of the asset is reduced to its fair value. In other words, if an organization is experiencing a change in its financial circumstances—such that its long-lived assets may be overvalued—an impairment analysis is in order. ASC 842 addresses this type of payment in the excerpts shown below. If an entity elects to include operating lease cash flows in a test of asset recoverability, they should also be included in the impairment analysis. Atlanta, GA 30346. FASB recognizes that significant judgment will need to be applied by organizations to determine appropriate asset groups for recoverability. 9 For example, a company might view a store and its leasehold improvements or a manufacturing plant and its equipment as one asset group because the cash flows generated from those assets may not be able to be further allocated between the store and its leasehold improvements or the plant and its equipment. Generally, a debt agreement is entered into for the organization as a whole and secured by all the assets of a company, not a specific product or regional business. How to Account for Partial Lease Terminations, Lease Abandonment Accounting: Common Questions and a Full Example, Debt restructuring or application under federal relief programs (i.e. Copyright 2000-2020 LeaseAccelerator, Inc. All rights reserved. Do you need CPE credit? In addition, the lessor cannot have substantive rights to substitute the asset. The key factor here will be cash flows. The fair value of the asset (or asset group) less costs of disposal, Significant changes specific to the company such as a decrease in the market price of the asset, the way the asset is being used or its physical condition, Significant changes in the operations or cash flows of the asset, Legal proceedings that impact the future use or value of the asset, Other general impacts such as adverse changes to the economy or business climate, If the expected cash flows are greater than the net book value of the asset, the asset is “recoverable” and, If the net book value of the asset is greater than its estimated future cash flows, the asset (or asset group) does not pass the recoverability test and, Cash outflows required to ready the asset or CGU for use and required to generate its cash inflows, Net cash flows related to the sale or disposal of the asset or CGU at the end of its useful life.
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