How do you assess the impairment of aircraft under lease agreements?

1 Identify impairment indicators

When assessing leased aircraft, it's important to identify any indicators of impairment. These can be external, such as a decline in market value or a decrease in demand for the aircraft type, or internal, such as deterioration in physical condition or modification of the aircraft. Additionally, a breach or termination of the lease agreement or a change in the expected use of the aircraft should be considered. If any of these indicators are identified, an impairment test should be performed.

2 Measure recoverable amount

The second step in assessing the impairment of an aircraft is to measure its recoverable amount. This is the highest of its fair value less costs of disposal and its value in use. To calculate fair value less costs of disposal, you need to subtract any costs associated with selling or transferring the asset from the amount you could obtain from selling it in an orderly transaction between market participants. On the other hand, value in use is the present value of the future cash flows expected to be generated from using and disposing of the aircraft at the end of its useful life. To calculate this, you need to estimate future cash inflows and outflows, as well as the expected residual value and appropriate discount rate that reflects the risks and uncertainties of the cash flows. Additionally, you should consider any contractual or legal restrictions that may affect the recoverable amount. For all estimations, you should use the best available information and assumptions that reflect current market conditions and expectations.

3 Record impairment loss

The third step is to record the impairment loss if the carrying amount of the aircraft exceeds its recoverable amount. The carrying amount is the amount at which you report the aircraft on your balance sheet, which is usually the cost of the asset less any accumulated depreciation and any accumulated impairment losses. The impairment loss is the difference between the carrying amount and the recoverable amount, and it reduces the carrying amount of the asset. You should recognize the impairment loss in your income statement as an expense, unless the asset is carried at revalued amount, in which case you should recognize the loss in other comprehensive income. You should also disclose the impairment loss and its causes in your financial statements and notes.

4 Review impairment loss

The fourth step is to review the impairment loss at each reporting date and reverse it if there is an indication that the impairment no longer exists or has decreased. This may happen if there is a change in the market conditions, the physical condition, or the contractual terms of the lease that increases the recoverable amount of the aircraft. However, you cannot reverse the impairment loss beyond the original carrying amount of the asset, adjusted for depreciation, as if no impairment had occurred. You should also recognize the reversal of the impairment loss in your income statement or other comprehensive income, depending on how you recognized the original loss. You should also disclose the reversal of the impairment loss and its reasons in your financial statements and notes.

5 Apply lease accounting standards

The fifth step is to apply the relevant lease accounting standards to your lease agreements and your impairment assessments. Depending on whether you are a lessee or a lessor, and whether your lease is classified as an operating lease or a finance lease, you may have different accounting treatments for your lease payments, your leased assets, and your impairment losses. For example, under IFRS 16, lessees have to recognize right-of-use assets and lease liabilities for all leases, except for short-term leases and low-value leases, and they have to apply the same impairment rules as for other non-financial assets. Lessors, on the other hand, have to classify leases as operating leases or finance leases, and they have to account for impairment losses differently depending on the lease classification. You should consult the relevant accounting standards and guidance for more details on how to account for leases and impairments.

6 Assess impairment impacts

The sixth and final step is to assess the impacts of impairment on your lease income recognition and your financial performance and position. Impairment can affect your lease income recognition by reducing your revenue from lease payments, your interest income from finance leases, or your gains or losses from disposal of leased assets. Impairment can also affect your financial performance and position by reducing your net income, your return on assets, your asset turnover, your debt-to-equity ratio, or your cash flow from operations. You should monitor and analyze these impacts and communicate them to your stakeholders, such as investors, lenders, regulators, or auditors. You should also consider any implications for your tax obligations, your compliance with covenants, or your risk management strategies.

7 Here’s what else to consider

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