How is right-of-use asset impairment tested under ASC 842 and ASC 360?

Under ASC 842 ROU asset impairment testing, a right-of-use asset is subject to the same long-lived asset impairment framework as any other tangible asset — meaning lessees apply ASC 360-10 to test, measure, and recognize impairment of operating and finance lease ROU assets. - Asset grouping and triggering events (ASC 360-10-35-21): ROU assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent. A triggering event — such as a significant decline in market conditions, abandoned or subleased space, or a plan to cease use before lease end — initiates the two-step impairment process. - Recoverability test — Step 1 (ASC 360-10-35-17): Compare the carrying amount of the asset group (including the ROU asset) to the sum of undiscounted expected future cash flows. If the carrying amount exceeds undiscounted cash flows, the asset group is not recoverable and Step 2 is required. - Measurement of impairment loss — Step 2 (ASC 360-10-35-17): Impairment equals the excess of the asset group's carrying amount over its fair value. Fair value is typically estimated using a discounted cash flow model. The impairment loss is allocated pro-rata to the long-lived assets in the group, but not to assets outside the scope of ASC 360 (e.g., the lease liability itself, inventory, AR).

How does post-impairment amortization differ between a finance lease ROU asset and an operating lease ROU asset under ASC 842-20-35-9?

- Operating vs. finance lease ROU assets (ASC 842-20-35-9 and ASC 842-20-25-6): Both operating and finance lease ROU assets are within ASC 360's scope. For operating leases, post-impairment amortization accelerates because the reduced carrying amount is amortized over the remaining lease term using the front-loaded straight-line pattern that produces the single lease cost. This often results in a higher straight-line lease cost going forward. - Sublease scenarios (ASC 842-20-35-4): When a lessee abandons space and enters or plans to enter a sublease, the expected sublease income is incorporated into the undiscounted cash flow model for the recoverability test. If sublease income does not cover the remaining lease payments, impairment is likely. - Disclosure requirements (ASC 360-10-50-2): Entities must disclose the facts and circumstances leading to impairment, the segment affected, and how fair value was determined, including the valuation method and key inputs used. Scenario: A lessee has an operating lease ROU asset with a carrying value of $2,400,000 and a corresponding lease liability of $2,200,000. Due to a workforce reduction, the company vacates 40% of leased office space with 4 years remaining. The undiscounted future cash flows attributable to the asset group are $1,800,000; fair value of the asset group is determined to be $1,500,000. The ROU asset represents 100% of the long-lived assets in the group.

If a lessee subleases impaired space and subsequently recovers value, can the previously recognized ROU asset impairment be reversed under ASC 360?

Step 1: Carrying amount $2,400,000 > Undiscounted cash flows $1,800,000 → Not recoverable; proceed to Step 2. Step 2: Impairment loss = $2,400,000 − $1,500,000 = $900,000 | Account | Dr | Cr | |---|---|---| | Impairment Loss — ROU Asset | $900,000 | | | Right-of-Use Asset (Operating) | | $900,000 | Post-impairment, the remaining ROU asset balance of $1,500,000 is amortized on a revised straight-line basis over the remaining 4-year term. The lease liability is not adjusted — it continues to be unwound using the effective interest method per ASC 842-20-35-4.

How should a lessee determine the appropriate asset group when a single leased facility contains both abandoned and actively used portions under ASC 360-10-35-23?

- Adjusting the lease liability for impairment: A frequent error is reducing the lease liability when an impairment is recorded. The liability represents a financial obligation that exists independent of asset performance; only the ROU asset carrying value is written down per ASC 842-20-35-9. - Incorrect asset grouping: Practitioners sometimes test the ROU asset in isolation rather than as part of the appropriate asset group. This can inflate or deflate the recoverability test result. The ROU asset must be grouped at the level where cash flows are generated (ASC 360-10-35-23). - Forgetting accelerated amortization for operating leases: After impairment, operating lease ROU asset amortization increases, but total lease cost (amortization + interest) may still approximate straight-line if not recalculated carefully. Failing to recompute the amortization schedule results in misstated lease cost in periods following impairment. - ASC 360-10-35-17 — Recoverability test and impairment measurement for long-lived assets - ASC 360-10-35-21 — Identification of triggering events requiring impairment testing - ASC 360-10-35-23 — Asset grouping at the lowest level of identifiable independent cash flows - ASC 842-20-35-9 — Explicit confirmation that ROU assets are subject to ASC 360 impairment guidance - ASC 842-20-25-6 — Post-impairment amortization treatment for operating lease ROU assets - ASC 360-10-50-2 — Required disclosures for recognized impairment losses

ASC 842 ROU Asset Impairment Testing

ASC 842 ROU Asset Impairment Testing — Core Rule

Under ASC 842 ROU asset impairment testing, a right-of-use asset is subject to the same long-lived asset impairment framework as any other tangible asset — meaning lessees apply ASC 360-10 to test, measure, and recognize impairment of operating and finance lease ROU assets.

How ASC 842 ROU Asset Impairment Testing Works

Asset grouping and triggering events (ASC 360-10-35-21): ROU assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent. A triggering event — such as a significant decline in market conditions, abandoned or subleased space, or a plan to cease use before lease end — initiates the two-step impairment process.

Recoverability test — Step 1 (ASC 360-10-35-17): Compare the carrying amount of the asset group (including the ROU asset) to the sum of undiscounted expected future cash flows. If the carrying amount exceeds undiscounted cash flows, the asset group is not recoverable and Step 2 is required.

Measurement of impairment loss — Step 2 (ASC 360-10-35-17): Impairment equals the excess of the asset group's carrying amount over its fair value. Fair value is typically estimated using a discounted cash flow model. The impairment loss is allocated pro-rata to the long-lived assets in the group, but not to assets outside the scope of ASC 360 (e.g., the lease liability itself, inventory, AR).

Operating vs. finance lease ROU assets (ASC 842-20-35-9 and ASC 842-20-25-6): Both operating and finance lease ROU assets are within ASC 360's scope. For operating leases, post-impairment amortization accelerates because the reduced carrying amount is amortized over the remaining lease term using the front-loaded straight-line pattern that produces the single lease cost. This often results in a higher straight-line lease cost going forward.

Sublease scenarios (ASC 842-20-35-4): When a lessee abandons space and enters or plans to enter a sublease, the expected sublease income is incorporated into the undiscounted cash flow model for the recoverability test. If sublease income does not cover the remaining lease payments, impairment is likely.

Disclosure requirements (ASC 360-10-50-2): Entities must disclose the facts and circumstances leading to impairment, the segment affected, and how fair value was determined, including the valuation method and key inputs used.

ASC 842 ROU Asset Impairment Testing — Practical Example

Scenario: A lessee has an operating lease ROU asset with a carrying value of $2,400,000 and a corresponding lease liability of $2,200,000. Due to a workforce reduction, the company vacates 40% of leased office space with 4 years remaining. The undiscounted future cash flows attributable to the asset group are $1,800,000; fair value of the asset group is determined to be $1,500,000. The ROU asset represents 100% of the long-lived assets in the group.

Step 1: Carrying amount $2,400,000 > Undiscounted cash flows $1,800,000 → Not recoverable; proceed to Step 2.

Step 2: Impairment loss = $2,400,000 − $1,500,000 = $900,000

Account	Dr	Cr
Impairment Loss — ROU Asset	$900,000
Right-of-Use Asset (Operating)		$900,000

Post-impairment, the remaining ROU asset balance of $1,500,000 is amortized on a revised straight-line basis over the remaining 4-year term. The lease liability is not adjusted — it continues to be unwound using the effective interest method per ASC 842-20-35-4.

ASC 842 ROU Asset Impairment Testing — Common Pitfalls

Adjusting the lease liability for impairment: A frequent error is reducing the lease liability when an impairment is recorded. The liability represents a financial obligation that exists independent of asset performance; only the ROU asset carrying value is written down per ASC 842-20-35-9.

Incorrect asset grouping: Practitioners sometimes test the ROU asset in isolation rather than as part of the appropriate asset group. This can inflate or deflate the recoverability test result. The ROU asset must be grouped at the level where cash flows are generated (ASC 360-10-35-23).

Forgetting accelerated amortization for operating leases: After impairment, operating lease ROU asset amortization increases, but total lease cost (amortization + interest) may still approximate straight-line if not recalculated carefully. Failing to recompute the amortization schedule results in misstated lease cost in periods following impairment.

ASC 842 ROU Asset Impairment Testing — Key Paragraphs

ASC 360-10-35-17 — Recoverability test and impairment measurement for long-lived assets
ASC 360-10-35-21 — Identification of triggering events requiring impairment testing
ASC 360-10-35-23 — Asset grouping at the lowest level of identifiable independent cash flows
ASC 842-20-35-9 — Explicit confirmation that ROU assets are subject to ASC 360 impairment guidance
ASC 842-20-25-6 — Post-impairment amortization treatment for operating lease ROU assets
ASC 360-10-50-2 — Required disclosures for recognized impairment losses