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“COVID-19 and the resulting economic environment has presented some interesting challenges for companies that have already adopted the new lease accounting standard ASC 842. The first is around impairment testing. As you probably know, under ASC 842, operating leases create both a liability and an asset on the balance sheet. The asset, which is referred to as a right of use or ROU asset, is tested for impairment in the same manner as owned long-lived assets, which is to say, under ASC 360. At a high level, that means that ROU assets are assigned to asset groups and tested for recoverability upon the occurrence of a triggering event. If the recoverability test fails, the fair value of the ROU asset is determined based on the remaining term of the lease and prevailing market rents.
"The discount rate used for ROU impairment is based on market participant assumptions, and that may be different from the company's IBR. If impairment is recorded, it's treated the same as other long-lived assets, which is to say, allocated to the asset group without reducing the value of individual assets below their floor values. Also, regardless of impairments recognized, the liability does not change unless contractual terms are re-negotiated and amended. Said another way, the liability does not change unless future contractual payments change. Another area that has come into the spotlight is lease concessions. This could get complicated, as Jeff mentioned, we don't have a ton of time, but at a high-level, lease concessions may be considered to be lease modifications, if not stipulated in the original lease contract. This assessment focuses on the enforceable rights and obligations in the least contract. That said, the FASB staff provided a practical expedient for concessions related to COVID-19.
"Again, at a very high-level, this election allows companies to choose whether or not to account for lease concessions related specifically to COVID-19 as lease modifications. You can find more detail on that on the FASB website under FASB staff Q&A. Finally, on the leasing topic, a few reminders on ASC 842 discount rates, we've seen a fair number of questions around this because there are some different discount rates in different scenarios. As you likely know, new leases and leases at adoption of ASC 842 are recorded at the relevant company specific incremental borrowing rate, or IBR or, less commonly, the implicit rate if it's determinable. However, different rates are used in the context of business combinations and ROU impairment testing. As discussed, market participant rates are used for purposes of ROU impairment testing and leases acquired in business combinations are remeasured at the acquirer's IBR not the acquiree’s IBR.”