-
7/22/2019 Case 12-9 Rough Waters Ahead
1/6
Case 12-9
Rough Waters Ahead
-
7/22/2019 Case 12-9 Rough Waters Ahead
2/6
GuidanceASC 360-10-35-17:
An impairment loss shall be recognized only if the carrying
amount of a long-lived asset (asset group) is not recoverableand
exceeds its fair value. The carrying amount of a long-livedasset
(asset group) is not recoverable if it exceeds the sum ofthe
undiscounted cash flows expected to result from the useand eventual
disposition of the asset (asset group).
An impairment loss shall be measured as the amount by which
the carrying amount of a long-lived asset (asset group)
exceedsits fair value.
Note that a long-lived asset or assets shall be grouped
withother assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cashflows
of other assets and liabilities (asset group).
-
7/22/2019 Case 12-9 Rough Waters Ahead
3/6
What is an asset group in our case?
Include $0.1 million working capital since it is
used to generate cash flows and cannot be
easily separated from long lived asset
Do not include cash flows from debt since
those are easily separable
So book value of the asset group is $4.7
mln=$4.6 mln+$0.1 mln
-
7/22/2019 Case 12-9 Rough Waters Ahead
4/6
Effects of multiple scenarios
Need to use probability weighted approach
(i.e. compute expected value of cash flows)
(ASC 360-10-35-30 )
Foreclosure results in a cash inflow in the
amount of the debt forgiveness, i.e. fair value
of the ship in the time of the foreclosure. So
undiscounted cash flows under option C are$4 mln=$1 mln+$3mln
(fv of the ship)
-
7/22/2019 Case 12-9 Rough Waters Ahead
5/6
Calculation of expected undiscounted
cash flow
$4.4 mln=10%*4mln (A)+20%*6 mln (B)+70%*4
mln (C)
Because $4.4 mln
-
7/22/2019 Case 12-9 Rough Waters Ahead
6/6
Alternative Facts
Under new set of probabilities, expected
undiscounted cash flows from 3 scenarios is
$4.8 mln which is higher than BV of the asset
group.
Hence, no impairment is recognized in this
situation.
