Right-of-use asset impairment for an underutilized terminal lease

A right-of-use asset for a leased terminal or cross-dock facility that has become significantly underutilized following the loss of an anchor customer or route rationalization is tested for impairment like any other non-financial asset, and the full contractual lease liability continues even where the space is no longer needed, creating a distinct exposure from fleet/goodwill-level impairment assessed at the cash-generating unit level. Overlooking this asset-side impairment while the liability remains fixed can leave a significant loss unrecognized on the balance sheet.

What indicators specific to this leased facility have emerged, significantly reduced throughput or occupancy versus the level assumed when the lease was signed, loss of an anchor customer, or route rationalization, and to which cash-generating unit do they point? Can the right-of-use asset be tested for impairment individually, or does it not generate largely independent cash inflows and therefore must be tested within a CGU together with related fleet or terminal assets? Are the value-in-use cash flows based on the realistic reduced-utilization scenario (including any genuinely achievable sublease income), rather than the original cash flows assumed when the lease was signed?

1) Monitor for indicators specific to leased facilities: significantly reduced throughput/occupancy versus the level assumed when the lease was entered into, loss of an anchor customer, or route rationalization affecting the facility's utilization. 2) Determine whether the right-of-use asset can be tested for impairment individually (if it generates largely independent cash inflows) or must be tested within a larger cash-generating unit. 3) If an indicator exists, estimate the recoverable amount (higher of fair value less costs of disposal and value in use), reflecting realistic reduced-utilization cash flow projections and any viable sublease income. 4) Recognize an impairment loss for the excess of carrying amount over recoverable amount. 5) Recognize that the lease liability is not adjusted by the asset-side impairment, it continues to be measured and unwound under IFRS 16 based on the contractual payments, regardless of the impaired asset value. 6) Reassess for impairment reversal indicators in later periods (a reversal is permitted for right-of-use assets, unlike goodwill).

Measure value in use using realistic expected future cash flows from the facility reflecting the reduced-utilization scenario, including any sublease income genuinely achievable, rather than the original business case cash flows used when the lease was signed. Discount at a rate reflecting current market assessments of the time value of money and risks specific to the facility. The lease liability remains measured under the normal IFRS 16 amortized cost approach (unaffected by the asset-side impairment), unless the lease itself is separately modified (e.g. subleased or renegotiated), which would be a distinct remeasurement event.

Disclose: (1) the indicators triggering the impairment review (lost anchor contract, reduced throughput); (2) the recoverable amount basis and key assumptions (revised throughput, sublease prospects, discount rate); (3) the resulting impairment loss on the right-of-use asset and the asset class affected; (4) that the lease liability remains unchanged and continues to be settled per its contractual terms; (5) any subsequent reversal of the impairment loss and the change in estimates that caused it.

• Continuing to depreciate the right-of-use asset on its original schedule without testing for impairment despite a clear indicator (lost anchor contract)
• assuming the lease liability can be reduced or written off to match the impaired asset value, when in fact it is unaffected by the asset-side impairment and continues per the contractual schedule
• using the original business-case cash flow projections instead of updated, realistic reduced-utilization forecasts
• failing to consider sublease potential when a genuine sublease market exists for the space.