Impairment Of Leases Think Outside The Box!

In my last article I discussed impairment considerations regarding the new IFRS standard—IFRS 16 Leases—and its implications for a lessee. In this article I would like to show you one more consideration regarding the impairment of leases which may not be so apparent at first glance. Additionally I'll discuss the accounting treatment of an impairment of leases for a lessor.

One more aspect to consider

The impairment of a right-of-use (ROU) asset with respect to leases for lessees reminds me of another often neglected aspect: onerous contracts. Does it ring a bell? Onerous contracts are governed by IAS 37 Provision, Contingent Assets, and Liabilities and are applied to any contract for which unavoidable costs of meeting the contract obligations exceed the economic benefits expected to be received under that contract. Such guidance was greatly applicable for lessees and operating leases. If an operating lease became onerous, based on IAS 37, a lessee would book a provision in amount of the present value of the obligation under that onerous contract.

Now, however, any circumstances (such as lease benefits falling below the level of the lease costs) will be already reflected in the impairment of ROU assets which I discussed in my last article. So how do IAS 37 and IFRS 16 peacefully co-exist? The response lies in the amendment of the scope of IAS 37 which now refers only to leases that become onerous before the commencement date of the lease as defined in IFRS 16 and to the short-term and low value leases accounted for in accordance with IFRS 16.6.

This ultimately leads to another question: what does it mean for the provisions for onerous contracts already recognized for operating leases? Well, it depends on the transition approach: under the modified retrospective approach, for example, an entity can apply...