Eagle Impairment Case
The following report outlines an analysis of Eagle Company’s assets in Serbia and Italy. With the information provided, we have created a detailed report to assess which assets should be impaired along with its impairment value under the IFRS and US GAAP standards.
Eagle in Italy
Eagle owns a commercial building in Italy. The carrying amount is $1,100 with $900 being the value in use. According to IAS 36 P18, “An asset is impaired when its carrying amount exceeds its recoverable amount.” In this case, the carrying amount ($1,100) exceeds the recoverable amount (Higher of Value in use) of $900. Eagle should report an impairment loss of the difference ...view middle of the document...
” The difference between the book value of the assets and its recoverable amount (given in the discounted cash flows under “Total present value as of 12/31/13”) is the impairment loss recorded: 1.05M-1.3M=-250K. Under IFRS, Eagle should record an impairment loss of $250,000 for their CGU in Serbia.
Under US GAAP
ASC 360-20-35-2 states, “Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.” Under US GAAP, Eagle’s CGU’s in Serbia should be tested under the goodwill impairment test after measuring it’s impairment.
• ASC 360-20-35-8: “If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any.”
The carrying value (determined above) of $1.3M exceeds the fair value of $1.05M indicating a need to calculate the determination of implied goodwill.
• ASC 360-20-35-9: “The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.”
Fair value of the CGU: $1.05M
Fair value less goodwill: $1M
Implied value: $1.05M-$1M= $50,000
Book value goodwill: $300,000
Implied value: $50,000
Impairment loss: $300,000-$50,000= $250,000
(3.2) Management’s assumption that “no costs to sell would be incurred” is acceptable; however their assumption of growth is not. IAS 36 P33 (c) states that to measure a value of an entity, “Estimate cash flow projections beyond the period…based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified”. The change in legislation at the end of 2013 significantly restricted the exports of Eagle’s main product. Because of this Eagle’s external environment becomes very volatile as industry reports “estimate no growth rate for the foreseeable future”. Certainly assuming a 1% increase from year to year is not acceptable in this context.
(3.2) IAS 36 P33 (b) also states that management should “exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset’s performance.” Eagle’s cash flow subtracted inflows from capital expenditures. It is...