BLM51020 - IFRS 16 leases: IFRS 16 lessees: taxation of IFRS 16 leases: impairments

IAS 36 Impairment of Assets requires the lessee to consider whether the lease has become impaired. This is an accounting test. Examples where a lease may need to be impaired would be if a property is vacated and there is no likelihood that the lessee will derive a future benefit from it, such as sub-leasing the property. If you have no reason to believe that the impairment of the right-of-use asset is not GAAP compliant the impairment should be accepted. Any instances where the lessee is still using the asset but there has been a significant impairment should be reviewed by an advisory accountant once all of the relevant facts have been obtained.

Example

Using the example in BLM51015 at the end of year 8 of the lease the lessee vacates the property. Given there are only two years left on the lease the lessee’s accountants conclude that no future economic benefit will be derived from the asset and fully impairs the right-of-use asset. The lease liability will continue to be shown on the balance sheet.

The following table sets out the accounting and tax adjustments arising in year 8 of the lease, which is the accounting period ended 31 December 2026.

Profit and Loss Account
Depreciation of right-of-use asset	Dr £11,500
Impairment of right-of-use asset	Dr £23,000
Interest expense	Dr £1,763
Tax Adjustments	Addback
Capital dilapidation costs	£750
Capital lease premium costs	£540