Rough Waters Ahead
1. How should Smooth Sailings’ management perform the recoverability test for the cruise ship as of December 31, 2010? In addressing this question, consider:
The following are the required steps to identify, recognize and measure the impairment of a long-lived asset (group) to be held and used:
Step 1: Indicators of impairment — FASB ASC 360-10-35-21
“A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.”
In this case, there is a possibility of impairment because of an increased presence of pirates in the area in which Smooth Sailing cruises, the cruise ship’s operating …show more content…
The sum of the undiscounted cash flows, given these new probabilities, is $4.5 million, i.e. [($4.0mm x 50%) + ($6.0mm x 40%) + ($1.0mm x 10%)] which is less than the carrying value of the asset group ($4.7mm). We therefore, recognize the same impairment loss of $(1,700,000) i.e. [$3mm - $4.7 mm]
Impairment Loss = $1,700,000.
However, if we do not include the net working capital of $.1 million, then the sum of the undiscounted cash flows is less than the net book value of the cruise ship at $4.6 million, which implies that it can be recovered and there is no impairment loss.
4. How would your answers to the above questions differ under IFRS? Support your answer with appropriate references to the IFRS standards.
Objective (IAS 36)
The objective of this Standard is 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 recognize an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.
• What assets and liabilities should be included in the “asset group” as defined by ASC 360-10 for purposes