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Accounting for leases

□ Include the operating leases payments as a cash outflow in the calculation of undiscounted cash
flows. This approach is similar to the current model for testing asset groups for impairment under
ASC 360 that have associated operating leases.

□ Exclude the interest portion of operating lease payments from the cash outflow in the calculation
of undiscounted cash flows. This approach is similar to the current model for capital leases tested
for impairment as part of an asset group.

If there is an impairment charge for a right-of-use asset associated with an operating lease, it would
not impact the value of the recorded lease liability absent a modification to the lease terms or a
reassessment of options to renew.

Once the right-of-use asset for an operating lease is impaired, lease expense will no longer be
recognized on a straight-line basis. A lessee should continue to amortize the lease liability using the
same effective interest method as before the impairment charge. The right-of-use asset, however,
should be subsequently amortized on a straight-line basis. The resulting accounting is similar to the
accounting a lessee would apply to a finance lease (see LG 4.4.1), however, the lease is still classified as
an operating lease, and a lessee should continue to follow operating lease presentation and disclosure
guidance.

4.7 Impairment – lessor

4.7.1 Sales-type and direct financing leases

A lessor should assess its entire net investment in the lease for impairment and recognize any
impairment loss in accordance with the loan impairment guidance in ASC 310 until ASC 326 adopted.
Once ASC 326 is adopted, that guidance should be applied to the net investment in the lease. See LI 7
for guidance.

The net investment in a sales type lease consists of the sum of the following:

□ Lease receivable, which is the present value of the lease payments and the guaranteed residual
value of the asset

□ Unguaranteed residual asset, which is the expected unguaranteed residual value of the asset
at the end of the lease term

For direct financing leases, the net investment includes these same amounts reduced by the amount of
any deferred selling profit.

Both the lease receivable and the unguaranteed residual asset must be considered when assessing the
net investment in the lease for impairment.

4.7.1.1 Lease receivable

When evaluating the loss allowance for the lease receivable portion of the net investment in the lease,
the lessor can only consider the lessee’s right to use the asset during the lease term as collateral for the
lease receivable and not the right to the residual asset. This is because in most cases, the only asset
that is available to the lessee is its right to use the leased asset during the lease term. Generally, the

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