ROU Asset Impairment Under FRS 102 Section 27
A right-of-use asset is an asset like any other, so it falls within the impairment requirements of Section 27. At each reporting date you assess whether there is an indicator that it may be impaired, and only if there is do you go on to estimate a recoverable amount.
When you have to look
There is no annual impairment test for a right-of-use asset. The trigger is an indicator, assessed at each reporting date. For leased property and equipment the indicators tend to be about how much use you are actually getting out of the asset.
| Indicator | What it looks like |
|---|---|
| Market rents have fallen | Similar space now lets significantly below what you are paying |
| Partial vacancy | You are not using all the space and have no plans to |
| Sub-optimal use | The asset runs well below the capacity you took it for |
| Plans to vacate | A decision to relocate or restructure has been taken |
| Adverse market conditions | A downturn has reduced the usefulness of the asset |
| Physical damage | The underlying asset has been damaged or has degraded |
| Technological obsolescence | For equipment, newer technology has overtaken it |
Measuring the recoverable amount
Recoverable amount is the higher of fair value less costs to sell and value in use. For a leased asset, fair value less costs to sell means what the right of use could be sold for, including by assigning the lease, net of disposal costs. Value in use is the present value of the future cash flows you expect to derive from it.
What feeds value in use
The economic benefit you actually derive from using the asset, any sub-let income you are permitted to earn, and the remaining lease term. Where sub-letting is prohibited by the lease, that route is closed and value in use rests on your own use alone.
The loss
Impairment loss equals carrying amount less recoverable amount. If recoverable amount is the higher of the two measures and it still exceeds carrying amount, there is no impairment.
Recognising it
Reduce the carrying amount of the right-of-use asset to its recoverable amount and take the loss to profit or loss. Then, and this is the step most often missed, recalculate depreciation: future charges run on the reduced carrying amount over the remaining term, not on the original cost.
The liability does not move
Depreciation after an impairment
Reversals
Section 27 also requires you to assess at each reporting date whether a loss recognised in a prior period may no longer exist or may have decreased. Where it has, you increase the carrying amount and take the reversal to profit or loss, but only up to what the carrying amount would have been, net of depreciation, had the impairment never been recognised.
Impairment against onerous lease
The two are different things and it is worth being clear which you are dealing with. An impairment writes down an asset you hold. An onerous lease provision under Section 21 recognises a liability where the unavoidable costs of meeting the lease exceed the benefits expected from it. At transition there is an expedient that lets you rely on the Section 21 onerous lease assessment made immediately beforehand instead of performing a Section 27 review.
FRS 102 Reference: FRS 102.1.53(b)
In Lease102
Record the impairment against the lease with its date and amount. The schedule recalculates depreciation from that point over the remaining term, the roll-forward reports show the impairment as its own movement rather than an unexplained drop in carrying amount, and the audit trail keeps the before and after. Reversals are recorded the same way.