Following the adoption of ASC 842, leases are recorded on the balance sheet. These new right-of-use (“ROU”) assets are tested for impairment under ASC 360 in a manner consistent with owned long-lived assets held and used. Stout’s Accounting & Reporting Advisory (“ARA”) team supported the recoverability testing (commonly referred to as “Step 1”) for the population of over 900 asset groups by looking at forecasted undiscounted cash flows. In performing this analysis, a risk-based approach was taken to qualitatively and quantitatively evaluate the portfolio. Upon completion of this process, Stout and the client determined which asset groups required their fair value to be determined. 

The “Step 2” process, which compares the carrying value of the asset group to its respective fair value, was supported by both the Stout ARA and Real Estate teams. The fair value of an ROU asset is what a market participant would pay upfront to use the leased asset for the remaining lease term. Through market analysis for the respective property type, size, and geographic location, the current market rent was determined. Based on the expectations of a market participant, including rent escalations and an appropriate discount rate, the fair value of the ROU was computed.