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Accounting for leases

Straight-line Increase Deferred rental
Cash payments income (decrease) receivable
(A) (B) (B – A) balance

Commencement $ —

Year 1 $6,000 $6,600 $600 600

Year 2 6,600 6,600 — 600

Year 3 7,200 6,600 (600) —

$19,800 $19,800 $ —

Lessor Corp would continue to depreciate the underlying asset over the economic useful life of the
asset.

Questions often arise as to whether a lessor should recognize uneven rent payments on an other than
straight-line basis if the rent increases are designed to reflect estimated future market rents. Although
this is common in real estate leases, we believe that the income should be recorded on a straight-line
basis even in these situations.

4.6 Impairment – lessee

A lessee’s right-of-use asset is subject to the same asset impairment guidance in ASC 360 applied to
other elements of property, plant, and equipment. See PPE4 for further guidance on impairments of
tangible and intangible assets.

4.6.1 Finance leases

If a lessee records an impairment charge on a right-of-use asset associated with a finance lease, it
should revise the amortization expense by calculating a new straight-line amortization based on the
revised asset value.

4.6.2 Operating lease

As noted in LG 4.4.2, the amortization of an operating lease right-of-use asset generally increases over
the lease term. As a result, throughout the lease term, the net book value of a right-of-use asset
resulting from an operating lease is typically greater than it would have been had the lease been
classified as a finance lease. Because of this higher value, a right-of-use asset arising from an operating
lease may have a higher risk of impairment.

In order to assess the right-of-use asset for impairment, the lessee will need to determine whether the
interest portion of operating lease payments should be included as a cash outflow in determining the
undiscounted cash flows when applying the recoverability test in ASC 360, Property, Plant, and
Equipment. The following approaches can be considered:

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