Lease impairment and sublease accounting can change how a right-of-use asset is measured or how an intermediate lessor reports a new lease. Neither event automatically cancels the original head lease.
Keep the accounting layers separate
A lessee tests an ROU asset for impairment under the applicable long-lived-asset guidance. After impairment, an operating lease's later single-cost pattern changes because the reduced asset must be measured under the post-impairment rules. A sublease creates a second contract in which the original lessee becomes an intermediate lessor. The head-lease liability ordinarily remains unless the original obligation is legally extinguished.
For example, a retailer closes a leased store and subleases the space. It continues to owe rent to the head lessor. The retailer must assess the ROU asset for impairment, classify and account for the sublease, and retain the head-lease liability. Recording only expected net cash from the subtenant would hide the gross contractual obligation.
Topic 842 classifies a sublease by reference to the underlying asset rather than the ROU asset. Complex sublease chains remain outside this family's scope. Read the sublease classification rule in ASC 842-10-25-6 and lessee impairment guidance in ASC 842-20-35-9.
Put the concept to work
Understand this concept
- Explain how supplied ROU impairment changes subsequent expense mechanics and how an intermediate lessor keeps head-lease obligations distinct from sublease classification and income.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Long-lived asset impairment — Apply
To understand this concept: Required. Topic 360 provides the impairment route for ROU assets.
- Right-of-use asset — Apply
To understand this concept: Required. Impairment acts on the ROU asset rather than the lease liability.