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Theory and Practice

9.1.1 Example - Asset Impairment

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✔ Applies to US GAAP (ASC 360) Finance Leases

✔ Applies to US GAAP (ASC 360) Operating Leases

✔ Applies to IFRS (IAS 36)

✔ Applies to UK GAAP (FRS 102)

A five-year building lease had an initial ROU Asset value of $500,000 that is being depreciated straight-line over five years. After two years, the expected benefit from the asset declines significantly. Now, the ROU Asset carrying amount is $300,000. For the remaining three years, the estimated undiscounted cash flows are $240,000 and the estimate discounted value (present value) is $220,000.

Even though the impairment tests differ (Carrying amount vs Recoverable amount for IFRS and UK GAAP, and Carrying amount vs Undiscounted Cash flows under US GAAP), impairment is required in both instances, and both require the impairment to reduce the value of the ROU Asset to its fair value, which is the PV of $220,000. An impairment loss is therefore recognized:

Account Debit Credit
Impairment Loss $80,000
ROU Asset $80,000
 
The ROU Asset's carrying amount is reduced to its fair value, and future depreciation will reflect the reduced value.

Doing it in Sage Intacct Lease Accounting

  1. If this happens with the initial recognition of the lease,

    1. Enter the $80k as a positive value in the Lease Liability to ROU Asset adjustment on the Lease info tab;

    2. When the initial recognition entry is posted to the GL, the journal will have 3 lines: CR Lease Liability, DR ROU Asset and DR the LL Adjustment Account. This latter account will receive the $80k as a debit; and

    3. Reclass the $80k entry to Impairment Loss by either editing the journal created by Lease Accounting or entering an additional Journal Entry.

  2. If this occurs after the lease has been placed in service,

    1. Take the Lease out of Service;

    2. Edit the Lease and increase the ease Liability to ROU Asset adjustment on the Lease info tab by $80k;

    3. Revalue the Lease;

    4. Place the Lease back in Service - which will post an entry to the GL, CR ROU Asset and DR the LL Adjustment Account. This latter account will receive the $80k as a debit; and

    5. Reclass the $80k entry to Impairment Loss by either editing the journal created by Lease Accounting or entering an additional Journal Entry.