Case #2 (Eagle Impairment Loss)
Question 1: The Impairment Loss of Eagle in Italy under IFRS
Recoverability test: Asset’s carrying amount exceeds the recoverable amount which is the higher of the asset’s value-in-use (discounted present value of the asset’s expected future cash flows) and fair market value less costs to sell. (IAS36-15)
According to IAS36-6, “an impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
The impairment loss = Carrying amount - Value in use = $1,100,000-900,000=$200,000
Question 2: The Impairment Loss of Eagle in Italy under U.S. GAAP (FASB 360-10)
Recoverability test: Asset’s ...view middle of the document...
Allocate the impairment to goodwill first and any remaining impairment to other assets of the unit on a pro rata basis. Therefore, the impairment loss is simply $350,000 by subtracting the fair value $1.05 million from the carrying amount $1.4 million.
2. The assumption for calculating value in use
The management assumption of using straight-line method to calculate depreciation is reasonable (most company use straight-line to depreciate). And according to IAS36-51, “because the discount rate is determined on a pre-tax basis, future cash flows are also estimated on a pre-tax basis”. So it is appropriate to use pre-tax discount rate of 15% to calculate the present value of future cash flow. However it is not appropriate to say that there is consistent growth on the revenue of CGU, the values of capital expenditure that they get in calculating future cash flow are also not appropriate.
- In accordance with IAS36-33 (a), in measuring value in use an entity shall base cash flow projections on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Greater weight shall be given to external evidence. And based on IAS36-33 (c), “this growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, unless a higher rate can be justified”.
Since we know the external industry reports estimate no growth rate for the foreseeable future. So, according to above guidance from IAS36-33(a) and (c), the growth rate that we used in cash flow calculation table is not appropriate (the average growth rate should be zero or very closed to zero).
- According to IAS33-(b), we should “exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset’s performance”. And based on IAS36-50, “Estimates of future cash flows shall not include: (a) cash inflows or outflows from financing activities; or (b) income tax receipts or payments.”
In eagle impairment case, when the management calculated capital expenditure (cash outflows) for the year of 2011 and 2012, they included $450,000 and $470,000 expenditure for modifying the main product (and they expected these will bring benefit in the future to help them deal with export restriction).These expenditure should be considered as the expenditure to enhancing the performance of asset, so...