ASC 360 defines an asset group as long-lived assets separated into “the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.”. display: none !important; In either instance, however, the current global economic situation warrants further look at long-lived assets as several indicators to possible impairment exist. Will I need to impair my assets due to COVID-19? If warranted by the recoverability test, calculate the impairment loss as the difference between the carrying value recorded and the fair value of the asset. 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. Under US GAAP and IFRS, a company should evaluate long-lived assets for indicators of impairment if a significant change to its operations or the asset has occurred. IAS 36 uses the term cash-generating unit (CGU) but the concept is largely the same. A company must analyze assets for recoverability at the lowest level cash flows are identifiable. 1. When assessing the future cash flows of an asset group, an organization should perform the analysis using current company data. The other logos (brand identities) presented on this website are property of their respective owners. Regardless of whether or not a company anticipates an impairment of its assets, a preliminary review of economic indicators to evaluate any potential impairment and analysis of recoverability is something companies should consider performing in the first half of 2020. Additionally, ASC 842 looks at operating leases as operating liabilities. 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. by business segment, product, location, or geographic area) to assist with identifying CGUs. Once an organization has made the decision to include or exclude an operating liability in a leased asset evaluation, they must document and apply that decision consistently across the company. The IASB also recognizes that organizations may use significant judgment to allocate CGU’s appropriately and also provides guidance to use the company’s approach to managing operations (i.e. The recoverable amount is the higher of the fair value of the asset (or CGU) less costs of disposal or the VIU. An organization will still need to review financial results, operations, and sustainability to make an accurate assessment of whether or not leased assets need to be analyzed for impairment. ASC 360-10-35-21 and IAS 36 paragraph 12 provide some examples of internal and external changes in events or circumstances that might drive an evaluation of impairment. To determine what qualifies as “substantially all,” the parties must define the economic benefits of the asset and then determine the allocation of economic benefits. With operating leases, a straight-line expense profile typically results. As a result of the COVID-19 pandemic, there may be various accounting and financial reporting considerations specific to the application of the US GAAP and IFRS lease accounting requirements, including those introduced by the FASB’s new lease accounting standard (ASC 842). When calculating the VIU, the discount rate used should reflect the time value of money and the risk premium associated with the asset. Please see www.pwc.com/structure for further details. However, in most cases a right-of-use (ROU) asset will be recognized on the balance sheet along with a corresponding liability for the lease obligation. The final point to make regarding the test of recoverability of an asset group is that it can become fairly nuanced, especially in times of a broad economic downturn. 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. Depending on your organization’s industry, the coronavirus pandemic may have significant impacts on 2020 financial reporting considerations. This guide was partially updated in November 2019. PwC’s videos review the impact of the new ASC 842 leasing standards, as well as various technical accounting requirements, including variable payments and the discount rate. From within the action menu, select the “Copy to iBooks” option. Under US GAAP, once you have reviewed the current economic and operational circumstances to determine that an impairment may be triggered in your asset (or asset group), you must perform the recoverability test specified by ASC 360-10-35-17 to determine whether impairment analysis is required. When estimating the future cash flows attributable to an asset group under ASC 360 the company should evaluate the asset group over its remaining useful life. Cruise lines may also offer significant reductions to travel fares to drive volume. FASB recognizes that significant judgment will need to be applied by organizations to determine appropriate asset groups for recoverability. All rights reserved. ASC 842 represents a significant overhaul of the accounting treatment for leases, with the most significant change being that most leases, including most operating leases, are now capitalized on the balance sheet. Guidance for ASC 360 provides for generally excluding financial liabilities (such as long-term debt) and including operational liabilities (such as accounts payable) in the cash flows used to test recoverability. Check how your leases are classified under ASC 842 using the lease classification tool. Under ASC 360 when the carrying value of an asset group is not deemed to be recoverable, it is typically impaired. four Further, you should expect that your auditors may want to see an impairment analysis of your long-lived assets, including any ROU assets. Under ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than or equal to 12 months in length. The amount of the impairment loss is calculated as the difference between the carrying value and the recoverable amount and is also recorded as a debit to impairment loss and a credit to the asset’s carrying value. These cash flows should also be for the remaining useful life of the asset or CGU and should include estimated: Overhead costs, to the extent they can be allocated on a reasonable and consistent basis, should be included in the estimates, but cash flows from financing activities or taxes should not. Under IFRS 16’s single-model approach to lease accounting, for all lessees, the lease arrangements are classified as finance leases, and therefore the lease liabilities are excluded from the analysis. The adoption of ASC 842 for public companies and IFRS 16 for international companies resulted in lease liabilities and ROU assets being recorded on an organization’s books for nearly all leases. Because overhead costs—such as executive salaries—are for the whole company and cannot be directly tied to a specific portion of the business, they are typically not included under US GAAP. The lessee must have the right to direct the use of the asset. EY’s Technical Line on year-end reminders for accounting and disclosure requirements under ASC 842 outlines suggested areas of focus for the first 10K. Your email address will not be published. Atlanta, GA 30346. Consider a chain of pizza restaurants with delivery and dine-in options.

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