Reference no: EM132636704

Bosh Oil Company (hereinafter "Bosh") operates several gas stations across the tri-state area, Pennsylvania, Delaware and New Jersey. Bosh owns the land on which the gas stations are built, along with the related structures. The fuel pumps are either purchased or leased from different companies.

On January 1, 2020, Bosh entered into a lease with Filler Inc. for new fuel pumps for some of its gas stations in Montgomery and Bucks Counties in Pennsylvania, with a noncancelable lease term of 10 years and no renewal options. These gas stations already have fuel pumps in operation, which are owned by Bosh.

Because of increasing competition in the region and mounting maintenance costs, on January 1, 2023 (hereinafter "Decision Date"), Bosh decided to cease use of the leased fuel pumps on January 1, 2025 (hereinafter "Cease-Use Date"), before the end of the lease term.

Key facts related to the transaction are as follows:

Fuel Pumps

• The right to use the new fuel pumps is a lease, and there are no other components of the contract.
• Bosh appropriately classified the lease as an operating lease. 
• Right-of-use (ROU) asset balance on the Decision Date - $11 million. 
• The ROU liability balance on the Decision Date - $11 million. 
• Between the Decision Date and the Cease-Use Date, Bosh plans to continue using the leased fuel pumps in the same manner, and as part of the same operation, as before the Decision Date.
• Bosh does not have the intent and ability to sublease the fuel pumps after the CeaseUse Date. 
• Although abandonment is likely, the decision to abandon the fuel pumps does not involve a binding commitment, and no substantial costs have been or will be incurred in relation to the abandonment.

Gas Stations

Decision Date:

Fair value - $19 million.

Carrying value - $22 million.

Undiscounted cash flows expected to be generated as a result of the gas stations use and disposal - $34 million.

The gas stations, inclusive of land, fuel pumps (both leased and owned), and related structures, constitute a single asset group for impairment purposes.

Requirements:

Question 1. How should Bosh account for its decision to abandon the leased fuel pumps?  Discuss the accounting impacts (if any) that occur on the Decision Date and after the Decision Date and Cease-Use Date.

Question 2. What is the impact of abandonment on impairment considerations related to the leased fuel pumps and gas stations, more specifically the following?

a. Whether the abandonment decision constitutes an impairment trigger.

b. Impact on current asset grouping of the ROU asset as a result of the abandonment decision.

c. Relevance of ROU asset's relative significance to the asset group.

d. Evaluation of whether an impairment needs to be recorded.