The implementation of the new leases standard (AASB 16) saw entities gross up balance sheets with right-of-use assets and lease liabilities. Here we respond to some common questions relating to the impact of this in performing impairment testing required by AASB 136 Impairment of Assets.
Right-of-use (ROU) assets are generally included in the carrying amount of a CGU as they generate cash inflows only in combination with other assets. Where this is not the case, ROU assets should be tested for impairment individually.
As with other liabilities, the lease liability is only included in the carrying amount of a CGU if a buyer would be required to assume that lease liability on disposal of that CGU.
Some factors to consider when assessing whether a buyer would assume the lease liability on disposal of the CGU could include:
If a buyer would assume the lease liability on disposal of the CGU, then the lease liability or lease payments are deducted from the CGU’s recoverable amount. How they are deducted depends on the model used:
If a buyer would not assume the lease lability on disposal of the CGU, for both VIU and FVLCD approaches, lease payments associated with that lease liability are not deducted from the recoverable amount cash flows.
When the lease term is shorter than the forecast period for the CGU and the operations of the CGU are dependent on the continued use of the underlying asset or a similar asset, the replacement of the lease through a new lease arrangement or acquisition is included in the cash flows.
When allocating impairment across assets in a CGU on a pro-rata basis, the carrying amount of an individual asset cannot be reduced below the higher of its recoverable amount and zero. This rule applies equally to any ROU assets within the CGU.
FVLCD is one possible method that can be used to determine the recoverable amount of a ROU asset that forms part of a CGU. One possible way to determine the FVLCD of this asset is by reference to the present value of amounts a market participant would pay to lease the underlying asset using market lease rates.
In our view, this approach can be applied for ROU assets irrespective of whether the lease contract permits subleasing. However, restrictions relating to the use of the asset, for example zoning regulations, should be considered when determining market rent.