...FASB 144 Impairment of Assets Assets held for use Includes land, building, equipment, natural resources, and intangible assets FASB 147 specifies that intangibles from the banking industry are covered by FASB 144 rules: Long-term customer relationship assets such as Depositor-relationships intangible assets Borrower-relationships intangible assets Credit card holder Intangible assets When should impairment be recognized? Testing each asset each period would be too costly Events or changes in circumstances indicate that its carrying amount may not be recoverable TRIGGERING EVENTS: Decline in market value Change in way asset is used or physical change in asset Adverse changes in legal factors or business climate Accumulated costs in excess of amounts originally expected to construct or acquire asset Current expectation that, more likely than not, a long-lived asset will be sold or disposed of significantly before the end of its previously estimated useful life Current period losses with history of operating or cash flow losses associated with asset To apply impairment tests A long-lived asset shall be grouped with other assets and liabilities at the lowest level for which identifiable...
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...GUIDELINES TO DETERMINE ASSET IMPAIRMENT AND REPORTING OF INSURANCE RECOVERIES ASSET IMPAIRMENT STEP 1: Identify “Potential” Impairments to Capital Assets The first step in the process is to identify “potential” impairments to capital assets. Identifying “potential” impairments to capital assets may not necessarily lead to recording an impairment loss. Refer to Step 1 of Exhibit 1 for a detailed decision tree. How is asset impairment defined? As stated above, GASB Statement No. 42, paragraphs 5 and 6 define asset impairment as “a significant, unexpected decline in the service utility of a capital asset.” • Significant: The events or changes in circumstances that lead to impairments are not considered to be normal and ordinary. • Unexpected: At the time the capital asset was acquired, the event or change in circumstance would not have been expected to occur during the useful life of the asset. • Decline in service utility: A reduction in the usable capacity that at acquisition was expected to be used to provide service, as distinguished from the level of utilization. o The current usable capacity of a capital asset that is less than its original usable capacity due to normal wear and tear and expected decline in useful life is not considered to be an impairment; however, impairing events or changes in circumstances that reduce usable capacity may indicate impairment. o Decreases in utilization and existence of, or increases in, surplus...
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...Joe Expert Senior Reviewed by: Manager XWZ CPA Adam Smith ISSUE: Grouping of long-lived assets to be held and used for impairment testing purposes. BRIEF BACKGROUND OF HISTORY A2 Auto Corporation (“A2 Auto”) is one of the world’s largest manufacturers and distributors of automobiles and automobile ancillary parts. In its Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”), A2 Auto has disclosed within Note 24, Segment Information, that it has four operating segments: (1) A2 Americas, (2) A2 Asia Pacific, (3) A2 Others, and (4) Financial Services. Note 12, Goodwill and Other Intangibles, disclose that A2 Auto has the same four reporting units. ACCOUNTING QUESTIONS 1. What are the appropriate criteria for the grouping of long-lived assets to be held and used for impairment testing purposes? 2. On the basis of the information in A2 Auto’s 2010 Form 10-K, what is the appropriate grouping for purposes of recognizing and measuring an impairment loss? 3. What audit considerations should be made when testing the appropriate grouping of long-lived assets for purposes of recognition and measurement of an impairment loss? 4. Is A2 Auto’s approach for testing goodwill for impairment after recognizing an impairment charge related to a long-lived asset group classified as held-and-used appropriate? 5. After the A2 Americas $1.76 billion impairment loss was recognized, strategy refocus effort began which has resulted in an improved forecast...
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...the accounting for impairment of long-lived assets in accordance with ASC 360-10. Applicable Professional Pronouncements ASC 360-10, Property, Plant, and Equipment: Overall (ASC 360-10) ASC 360-10 provides guidance on accounting for property, plant, and equipment, and the related accumulated depreciation on those assets. This Subtopic also includes guidance on the impairment or disposal of long-lived assets. ASC 360-10 notes that long-lived tangible assets include land and land improvements, buildings, machinery and equipment, and furniture and fixtures. ASC 820, Fair Value Measurements and Disclosures (ASC 820) ASC 820, Fair Value Measurements and Disclosures, applies to U.S. GAAP that require or permit fair value measurements or disclosures and provides a single framework for measuring fair value and requires disclosures about fair value measurement. The Topic defines fair value on the basis of an "exit price" notion and uses a "fair value hierarchy," which results in a market-based — rather than entity-specific — measurement. IAS 36, Impairment of Assets (IAS 36) To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined. Discussion 1 — Impairment Assessment for a Long-Lived Asset How should Smooth Sailings’ management perform the recoverability test for the cruise ship as of December 31, 2010? In addressing this question, consider: •What assets and liabilities should...
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...accounting treatments regarding tangible assets and goodwill as well as the effects of these treatments. Impairment exists when the carrying amount of an asset exceeds its fair value and the impairment loss is the difference between the carrying value and fair value of that asset. The impairment test rules applied to impairment of property, plant, and equipment are different from those used in measuring goodwill. For tangible assets to be held and used, a recoverability test is performed when possible impairment exists, to determine whether an impairment has occurred. The first step of the test is to estimate the future net cash flow expected from the use of that asset and its eventual disposition. If the future cash flow is less than the carrying amount of the asset, the asset is impaired. Conversely, if the future net cash flow is equal to or greater than the carrying amount of the asset, no impairment has occurred. For example, if an asset has a carrying value of $600,000, and the future net cash flow from using and disposing this asset is to be $650,000, therefore, no impairment has occurred. However, if the future net cash flow is less than the carrying amount of the asset, it’s only $550,000, there is an impairment loss, which is the amount the carrying value of the asset exceeds the asset’s fair value. In the example, if the fair value of that asset is $500,000, the impairment loss would be $100,000 ($600,000-$500,000). What if the impaired asset is going to be disposed instead...
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...IMPAIRMENT Depreciation, depletion, and amortization reflect a gradual consumption of the benefits inherent in an operational asset. An implicit assumption in allocating the cost of an asset over its useful life is that there has been no significant reduction in the anticipated total benefits or service potential of the asset. Situations can arise, however, that cause a significant decline or impairment of those benefits or service potentials. An extreme case would be the destruction of a plant asset—say a building destroyed by fire—before the asset is fully depreciated. The remaining carrying value of the asset in that case should be written off as a loss. Sometimes, though, the impairment of future value is subtler. The way we recognize and measure an impairment loss differs depending on whether the operational assets are to be held and used or are being held to be sold. Accounting is different, too, for operational assets with finite lives and those with indefinite lives. We consider those differences now. Operational Assets to Be Held and Used An increasingly common occurrence in practice is the partial write-down of operational assets that remain in use. For example, in the second quarter of 2001, American Airlines reduced the carrying value (book value) of certain aircraft by $685 million. The write-down reflected the significant reduction in demand for air travel that occurred even before the September 11, 2001, terrorist attacks on the World Trade Center and...
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...TeCHniCal THiS aRTiCle diSCuSSeS and SHowS boTH wayS of meaSuRing goodwill following THe aCquiSiTion of a SubSidiaRy, and How eaCH meaSuRemenT of goodwill iS SubjeCT To an impaiRmenT Review. IMPAIRMENT RelevanT To aCCa qualifiCaTion papeRS f7 and p2 Required 1 Calculate the goodwill arising on the acquisition of High on a proportionate basis. 2 Calculate the gross goodwill arising on the acquisition of High, ie using the fair value of the NCI. Solution 1 The proportionate goodwill arising is calculated by matching the consideration that the parent has given, with the interest that the parent acquires in the net assets of the subsidiary, to give the goodwill of the subsidiary that is attributable to the parent. Parent’s cost of investment at the fair value of consideration given $500 Less the parent’s share of the fair value of the net assets of the subsidiary acquired (80% x $400) ($320) Goodwill attributable to the parent $180 2 The gross goodwill arising is calculated by matching the fair value of the whole business with the whole fair value of the net assets of the subsidiary to give the whole goodwill of the subsidiary, attributable to both the parent and to the NCI. Parent’s cost of investment at the fair value of consideration given $500 Fair value of the NCI $100 Less the fair value of the net assets of the subsidiary acquired (100% x $400) ($400) Gross goodwill $200 Given a gross goodwill of $200 and a goodwill attributable to the parent of $180, the goodwill attributable...
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...IFRS: IMPAIRMENT OF LONG-LIVED ASSETS AT-A-GLANCE Increasing globalization coupled with related regulations continues to put pressure on moving towards a common global accounting framework – International Financial Reporting Standards (IFRS). Currently, more than 100 countries use IFRS, so if your business goals include global expansion, it is critical to educate yourself about the impact of IFRS on your financial reporting processes and business now. To gain a better understanding of what IFRS means for your organization, we have prepared a series of comparisons dedicated to highlighting significant differences between IFRS and U.S. generally accepted accounting principles (GAAP). This particular comparison focuses on the significant differences between U.S. GAAP and IFRS when accounting for the impairment of long-lived assets. For other comparisons available in this series, refer to our U.S. GAAP vs. IFRS comparisons at-a-glance series. A discussion about U.S. GAAP and IFRS would not be complete without mentioning the status of the Securities and Exchange Commission’s (SEC) activities focused on determining whether the application of IFRS by U.S. registrants should be required or allowed. While the SEC has not made any final decisions with respect to use of IFRS by U.S. registrants, its activities are ongoing. For more information, refer to our IFRS Resource Center. The guidance related to accounting for the impairment of goodwill and indefinite-lived intangible assets in U.S...
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...represents: A cash-generating unit (CGU) under IFRSs and a long-lived asset classified as held and used under U.S. GAAP. In December 2012, Donna’s competitor sold an identical commercial building much less than asking price. Information about the building is as follows. Donna’s Building 12/31/12 ($’000) Carrying amount $4,500 Value in use $4,000 Fair market value less cost to sell $3,800 Fair market value $3,900 Undiscounted future cash flows $4,200 Italian operation: Donna acquired an Italy company in 2010 and goodwill was recorded. The Italy operation represents a cash-generating unit (CGU) under IFRSs and a long-lived asset classified as held and used under U.S. GAAP. Information about the Italy operation before impairment analysis is as follows. Carrying Value Before Impairment Analysis 12/31/12 ($’000) Cash 50 Property, plant, and equipment (PP&E) 3,000 Land 150 Goodwill 300 Total assets 3,500 Liabilities (1,300) Carrying value 2,200 At the end of 2012, the newly elected government passed legislation that will adversely affect Donna. Donna’s management noted the following at 12/31/2012: 12/31/12 ($’000) Value in use of CGU 1,800 Present value of future cash flow from CGU 2,100 Fair value of CGU 2,100 Fair value of PP&E 3,100 Fair value of other assets and liabilities carrying value Cost to sell the CGU 400 The remaining useful life of Donna’s identifiable assets is six years as of the beginning of 2012, and Donna uses straight-line...
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...of your corporation’s tangible assets for possible impairments in value and also for possible impairment of value of the Goodwill booked on the corporation’s Balance Sheet, I have researched and concluded the following information and proper disclosures for XYZ Corporation. Tangible Assets Let’s begin with the tangible assets of the corporation. Over the useful life of the asset, it is necessary to periodically test for impairment. Impairment exists when the carrying value of a long-lived asset exceeds the fair value of the asset and is not recoverable. Various events and changes in circumstances can lead to an impairment, they include but are not limited to; a decrease in fair value of an asset, a change in the manner the asset is used, adverse changes in legal factors or the business climate that affects that value of the asset, and projected continual losses associated with the asset. To measure if there has been impairment on an asset, we must perform a recoverability test. The recoverability test has two steps. The first step is to compare the future net cash flows of the asset to the carrying value (book value) of the asset. If the future net cash flows are more than the carrying value, the asset is not impaired. However, if the future net cash flows are less than the carrying value, then the asset is impaired and the second step of the recoverability test needs to be taken. The second step is to recognize the loss of the impaired asset; which is the amount calculated...
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...Reflect the current period’s true and fair results. -Requirements for annual impairment testing of goodwill and other non-amortised intangible assets. -Difficulties surrounding the identification of a cash-generating unit. -Challenges in projecting cash flows and estimating various assumptions for the testing of value in use. Kolb’s TEL with Paul’s Critical Thinking Components: IAS 36 Impairment of assets-assess of key features Objects/Events: To prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss. To also specifies when an entity should reverse an impairment loss and prescribes disclosures. (IASC Foundation Education) Worldviews: Institutional Investor: likely to know the long term stability of business by reviewing the current true worth of assets. Standard Setters: To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined. (Deloitte Touche Tohmatsu, 2009) Assertions: Option2 =the reversal of an impairment loss on intangible assets and goodwill should be recognised in the current period if, certain conditions...
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...1. IAS 16 PROPERTY PLANT AND EQUIPMENT This standard regulates the measurement, recognition, derecognition and disclosure requirements of non-current assets and its related expenditure or income in the financial statements. It also defines the scope of it by stating clearly all assets falling within it. 1.1. Definition Property, plant and equipment refer to all tangible non-current assets used in the production or supply of goods and services, for administrative purpose or for rental to others. This definition emphasizes 4 important features of assets qualifying as PPE. a) They are tangible non-current assets. This creates the delineation well excluding clearly any asset that does not have physical appearance or used in the working capital cycle or to be realized just in the following year. b) Used in the production of goods and services. Also PPE are involved in the production process like machines or they are used to supply the goods after production has been made like motor vehicles. c) For administrative purpose.PPE again help businesses to carry out their official duties. For instance staff use cars of the company in their activities of the organization or this can be used as a place of conducting daily operations like building. d) Used for rental purpose.PPE are also used to earn investment income.i.e by giving it out for hiring for others to use (but excludes land and building for capital appreciation or hiring purposes) 1.2 Measurement This refers...
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...of the Company’s strategy refocus, management projects a decline in the net cash flows for the A2 Americas segment. As a result, in the third quarter of 2010, management has tested the long-lived assets of this segment for recoverability. They recorded a pretax impairment charge of $1.76 billion in cost of sales. Secondly, during the third quarter of 2010, management also reviewed their business plan for the Alpha and Beta operating units. These units projected lower sales, a decline in net cash flows, and currency exchange deterioration. As a result, they tested the long-lived assets of these units for recoverability and recorded a pretax impairment loss of $1.28 billion. Lastly, during 2009, management updated their Asia Pacific Improvement Plan for the Alpha and Beta operating units. They projected a decline in net cash flows for these units based on market projections that reflected the recent market performance for Alpha. As a result, management tested the long-lived assets for impairment and recorded a pretax impairment charge of $1.04 billion. After this 10-K was filed with the SEC, the SEC responded to the Company and required them to explain the inconsistencies of this reporting. The SEC noted that the Company had determined the appropriate amount of impairment for the A2 Americas segment for the Americas operations and the Alpha and Beta operating units for the A2 Asia Pacific segment. The SEC also asked the Company to advise them as to the nature and structure...
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...Subject: Eagle in Italy and Eagle in Serbia Impairments Date: May 7th 2014 1. For Eagle in Italy, is the building impaired under IFRS as of Dec. 31, 2013, and if so what is the amount of the impairment? After reviewing the given facts provided by Eagle in Italy, we have determined that there is an impairment on their building under IFRS for the amount of $200,000. We have determined this through the use of IAS-36 as well as the calculations given below: IAS 36-6 An impairment loss is the amount by which the carrying amount of the asset or a cash-generating unit exceeds its recoverable amount. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. Our recoverable amount then equals $900,000 because the value in use ($900,000) exceeds fair market value less costs to sell ($800,000). IAS 36-59 If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss. Recoverable Amount ($900,000) < Carrying Amount ($1,100,000) Therefore, we shall recognize an impairment loss of $200,000 2. For Eagle in Italy, is the building impaired under U.S. GAAP as of Dec. 31, 2013, and if so what is the amount of the impairment? After reviewing the given facts provided by Eagle in Italy, we have determined that there is not an impairment on their building under U.S. GAAP. We...
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...represent CGU under IFRS and reporting unit under U.S. GAAP. At the end of 2009 under GAAP and IFRS the recoverable amount of the asset including goodwill exceeded its carrying amount, suggesting that the goodwill allocated to the Spanish operations was impaired. At the end of 2010 a new legislation act was passed restricting exports of Ida’s main product. The following information relates to the CGU/reporting unit of Ida’s Spanish operations before impairment analysis: Cash$50,000 PP&E$3,000,000 Land$150,000 Goodwill$300,000 Total Assets$3,500,000 Liabilities($1,300,000) Carrying Value$2,200,000 As a result of the change in legislation, Ida’s production will be significantly affected for the foreseeable future. In addition, external industry reports estimate a stagnant growth rate for the foreseeable future. The significant export restriction and resulting production decrease are impairment issues that require Ida to estimate the recoverable amount of its operations as of the end of 2010. Ida’s management noted the following as of December 31,2010: Value in Use of CGU$1,800,000 Fair Value/PV of future cash flows$2,100,000 Fair Value of PP&E$3,100,000 Cost to sell CGU/reporting unit$400,000 The Fair Value of all assets and liabilities besides PP&E is equal to its carrying value. The remaining useful life of Ida’s identifiable assets is six years at the beginning of 2010 and Ida uses straight-line depreciation with no residual value. Issue 1) As of December...
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