As discussed in PPE 4.2.4, the subsequent measurement of a right-of-use (ROU) asset is subject to the guidance in ASC 842 and ASC 360-10. Refer to LG 4.4, for further details regarding the subsequent recognition and measurement of a lease under ASC 842. ASC 360-10 includes guidance related to the impairment and useful lives of long-lived assets. Similar to other long-lived assets, a ROU asset may be abandoned.

When a lessee decides to cease use of a leased asset under an operating lease either immediately or in the future, it should consider whether the ROU asset is or will be abandoned. For leased space, the ROU asset is generally not abandoned until the date the space is fully vacated and the lessee has no intention to further benefit from the leased space. Temporarily idling a ROU asset (e.g., leaving leased space unoccupied with plans to return at a future date) is not considered an abandonment under ASC 360-10-35-49. Additionally, a decision to sublease a leased asset does not constitute an abandonment as the lessee still intends to obtain economic benefits from the asset, just in a different capacity.

In some scenarios, a lessee may be uncertain as to whether it will sublease the leased asset. In these situations, we do not believe the ROU asset is abandoned because the lessee could potentially economically benefit from the ROU asset in the future, either through the lessee’s use or sublease. As a result, the ROU asset should continue to follow the held-and-used long-lived asset guidance of ASC 360-10, including for impairment and useful life considerations.

Alternatively, a lessee may assert that, despite having the contractual ability to do so, it has no plans to sublease the leased asset (e.g., when there is an oversaturation of supply in the real estate market). In this scenario, judgment is required to support a conclusion that the ROU asset is or will be abandoned. For example, when a lessee has a significant remaining lease term, it may be difficult to support abandonment, especially when a reasonable party would likely attempt to economically benefit from the leased space at some point in the future (e.g., through subleasing or alternative use). Alternatively, when there is an insignificant remaining lease term and the lessee can support that the leased space will not be used, or there is no reasonable possibility of subleasing the space for the remainder of the lease term, abandonment accounting may be appropriate.

Once a decision is made to abandon a ROU asset, the lessee should first consider whether any of the conditions in ASC 842-10-35-1 exist that would require reassessment of the lease term and lease classification. See LG 5.3 for information on circumstances that may require lease remeasurement. A lessee should also consider whether changes to lease components (e.g., in the case of a partial abandonment of leased space) or asset groups are necessary. A plan to abandon a ROU asset may not, in isolation, cause a reassessment of an asset grouping, particularly if the lessee is continuing to use the underlying asset in substantially the same manner for a period of time after the decision (i.e., the level of identifiable cash flows have not yet materially changed).

Regardless of whether asset groups change, the lessee should consider whether plans to abandon a ROU asset represent an impairment indicator at the asset group level. A long-lived asset (asset group) that is held and used should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset (asset group) may not be recoverable. ASC 360-10-35-21 provides indicators of impairment, including a significant adverse change in the extent or manner in which an asset (asset group) is being used. As such, the decision to abandon a ROU asset may be an indicator that an impairment test is required for the asset group. Determining whether a plan to abandon a ROU asset results in an impairment indicator to a broader asset group will require judgment and will in part be determined by the significance of the ROU asset to the overall asset group. See PPE 6.3.1 for information on the interaction between abandonment accounting and the long-lived asset impairment guidance. Additionally, see PPE 5.2.3 for information on evaluating long-lived asset impairment triggering events and PPE 5.2.7 through PPE 5.2.7.3 for information on applying the ASC 360-10 held-and-used impairment guidance to ROU assets.

After recognizing and measuring any impairment under ASC 360-10, adjustment of the useful life of the to-be-abandoned ROU asset may be necessary in accordance with ASC 360-10-35-47. The useful life assessment of a long-lived asset is based on the lessee’s assumption of the length over which it intends to use the asset. When the ROU asset is actually abandoned, its carrying amount should equal its salvage value as of the cease-use date.

If a ROU asset has not been impaired but its useful life has been shortened, one acceptable approach to subsequently account for the lease is to follow the accounting for a ROU asset that has been impaired, in which case amortization of the ROU asset and lease liability would be delinked in the subsequent accounting (see PPE 5.2.7.3). Example PPE 6-13 illustrates this delinked approach to account for the change in the remaining useful life of a ROU asset when it has not been impaired.

Another acceptable approach to subsequently account for the lease is to retain the linkage between the ROU asset amortization and the lease liability. In this case, the straight-line lease expense should be remeasured over the shortened useful life, which is consistent with the guidance in ASC 842-20-25-6(a). Example PPE 6-14 illustrates this linked approach to account for the change in the remaining useful life of a ROU when it has not been impaired.

EXAMPLE PPE 6-13
Accounting for a right-of-use asset to be abandoned (delinked approach)

Lessee Corp leases a specialized facility in a remote location from Lessor Corp on January 1, 20X1. Lessee Corp determines that the lease is an operating lease. The following table summarizes information about the lease and the leased asset.

How would Lessee Corp measure and record this lease?

Lessee Corp would first calculate the lease liability as the present value of the remaining unpaid monthly fixed lease payments discounted at Lessee Corp's incremental borrowing rate of 6%; this amount is $14,624,994. The ROU asset is equal to the lease liability on the lease commencement date. Lessee Corp would record the following journal entry on the lease commencement date.

Because Lessee Corp is required to pay $200,000 per month for eight years (excluding the first three months), the total lease payments are $18,600,000 ($200,000 × 93 months). Lessee Corp would then calculate the straight-line lease expense to be recorded each period by dividing the total lease payments by the total number of periods. The monthly straight-line expense would be $193,750 ($18,600,000/96 months).

Lessee Corp would calculate the amortization of the lease liability as shown in the following table. This table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis to reflect the frequency of the lease payments.

The amortization of the right-of-use asset is calculated as the difference between the straight-line lease expense ($193,750 per month) and the interest calculated on the lease liability. The following table shows this calculation. This table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis to reflect the frequency of the lease payments.

For the year ended December 31, 20X1, the following cumulative journal entries would have been recorded by Lessee Corp.

If on December 31, 20X5, Lessee Corp determines that it will only use the facility through December 31, 20X6 (assume Lessee Corp has concluded that the residual value will be $0), Lessee Corp would adjust the remaining useful life to one year. Doing so has no impact on the accounting for the lease liability. However, the change in the useful life would impact the accounting for the ROU asset and its subsequent amortization.

On December 31, 20X5, Lessee Corp would calculate the straight-line amortization of the right-of-use asset to be recorded each period for the remaining useful life by dividing the right-of-use asset balance ($6,349,203) by the remaining useful life (one year). The monthly straight-line amortization for the remaining useful life of the right-of-use asset would be $529,100 ($6,349,203/12 months). Subsequent to December 31, 20X6, the monthly lease expense would be equal to the effective interest on the lease liability for the remainder of the lease term.

The following table shows the annual accounting amortization and calculation. This table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis to reflect the frequency of the lease payments.

For the year ended December 31, 20X6, the following cumulative journal entries would have been recorded by Lessee Corp.

For the year ended December 31, 20X7, the following cumulative journal entries would have been recorded by Lessee Corp.

EXAMPLE PPE 6-14
Accounting for a right-of-use asset to be abandoned (linked approach)

Assume the same facts and accounting for the lease from inception through December 31, 20X5 as Example PPE 6-13. How would Lessee Corp account for the change in the remaining useful life of the right-of-use asset using the linked approach?

If on December 31, 20X5, Lessee Corp determines that it will only use the facility through December 31, 20X6 (assume Lessee Corp has concluded that the residual value will be $0), Lessee Corp would adjust the remaining useful life to one year. Doing so has no impact on the accounting for the lease liability. However, the change in the useful life would impact the accounting for the ROU asset and the straight-line expense.

On December 31, 20X5, Lessee Corp would calculate the straight-line lease expense to be recorded each period for the remaining useful life by dividing the right-of-use asset balance ($6,349,203) and the remaining interest on the lease liability ($625,797) by the remaining useful life (one year). The monthly straight-line lease expense for the remaining useful life of the right-of-use asset would be $581,250 (($6,349,203 + $625,797)/12 months). Subsequent to December 31, 20X6, the monthly straight-line lease expense would be $0 for the remainder of the lease term.

The amortization of the ROU asset would be calculated as the difference between the straight-line lease expense and the interest calculated on the lease liability. The following table shows this calculation. This table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis to reflect the frequency of the lease payments.

For the year ended December 31, 20X6, the following cumulative journal entries would have been recorded by Lessee Corp.

For the year ended December 31, 20X7, the following cumulative journal entries would have been recorded by Lessee Corp.