Jetrader - Winter 2016 - 38

ASC 360
Impairment Testing
for Commercial Aircraft
Under Operating Lease
By Michelle Siu, Director - Valuation, PwC

As market conditions in technology, fuel
prices or fleet aging shift, which leads to
changes in airline and customer needs,
an aircraft lessor or investor may be
required to test for asset impairment under
ASC 360 - Impairment for Long Lived
Assets. The ASC 360 impairment analysis
could be somewhat complex, especially
with considerations of different aircraft
types, age profiles and lease terms in the
lessor's fleet. This article provides guidance on what to think about, as well as
the type of data necessary prior to the
modeling process. Once the supportable
model is set up and thoroughly reviewed, it
is a matter of revisiting these assumptions
and reviewing the market and the aircraft
assets periodically consistent with business
needs and accounting guidance.

Definition of an Asset Group
An asset group is the unit of accounting
for testing a long-lived asset or assets
that will be held and used. It represents
the lowest level for which identifiable
cash flows are largely independent of
the cash flows of other groups of assets
and liabilities.1
Typically, if an aircraft is leased to a third
party under an operating lease, the aircraft
and associated lease is the asset group.
ASC 360 requires a two-step impairment
test:
* Step 1 - The asset carrying amount
(net book value) of the aircraft is first

compared with the undiscounted cashflows. If the carrying amount is lower
than the undiscounted cash-flows, no
impairment loss is recognized and step 2
is not necessary. If the carrying amount
is higher than the undiscounted cashflows, then Step 2 is necessary to measure any impairment loss.
* Step 22 - An impairment loss shall be
recognized only if the carrying amount
of the aircraft is not recoverable and
exceeds its fair value. The carrying
amount of the aircraft is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result
from the use and eventual disposition
of that aircraft. The assessment shall be
based on the carrying amount and fair
value of the asset group at the date it
is tested for recoverability. An impairment loss shall then be measured as the
amount by which the carrying amount
of the aircraft/asset group exceeds its
fair value.
* Fair value is defined as the price that
would be received to sell an asset or that
would be paid to transfer a liability in
an orderly transaction between market
participants at the measurement date.
* Alternatively, if the company reports
under the International Financial
Reporting Standards (IFRS), a one-step
test is used. The carrying amount of the
asset is compared with the recoverable
amount, with any excess of recoverable

38 The official publication of the International Society of Transport Aircraft Trading

amount over carrying amount representing the impairment loss. The recoverable
amount is the higher of:
1. the asset's fair value less costs to
sell, or
2. the asset's value in use.
This article focuses on certain considerations and guidance to develop estimates of future cash flows used to test
for ASC 360 Step 1 recoverability cash
flows for commercial aircraft.
These considerations can also be applied
by lessors with a fleet of helicopters or
corporate jets leased to various customers
as long as industry-specific assumptions
have been considered.

When to Test an Aircraft
Asset for Recoverability3:
An aircraft shall be tested for recoverability whenever events or changes in
circumstances indicate that its carrying
amount may not be recoverable. The following are examples of these instances:
1. A significant decrease in the market
value of the aircraft.
Example: Certain aircraft that are less
fuel efficient in a high oil price environment could become impaired and should
be tested for recoverability as operators
switch to more fuel efficient aircraft. The
introduction of a new aircraft variant or
type could also have a negative impact
on the market values of the previous
aircraft models or types.

Jetrader - Winter 2016

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