How does the Covid-19 pandemic impact asset impairments?
Due to the Covid-19 pandemic, many companies will need to evaluate their long-lived assets and asset groups for impairments due to the significant changes stemming from the pandemic, including:
- Changes in market value of assets
- Changes in use of assets (e.g., idle assets)
- Changes in physical condition
- Business closures or suspensions in service
- An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)
- A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)
- A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life
Consider a business that had entered into a three-year operating lease at the beginning of the year (payments of $5,000 due on the first of the month, 3.5% discount rate), but because of the Covid-19 pandemic, the fair value of the ROU asset is now significantly below its carrying value and estimated to be $100,000 after the World Health Organization announced the outbreak as a global pandemic on March 11, 2020.
The company originally recorded an asset and liability of $171,103.10 on Jan. 1, 2020, and recognized a daily lease expense of $164.23. Just prior to the announcement, the ROU asset had a carrying value of $160,554.40, which now exceeded its fair value estimated to be $100,000, so the company recognizes a $60,554.40 impairment loss on March 11, 2020. Going forward, lease expense is measured as the sum of the interest expense for the period plus the straight-line amortization of the remaining $100,000 ROU asset carrying value.