A2 Auto Corporation is one of the world’s largest manufacturers and distributors of automobiles and automobile ancillary parts. In its Form 10-K, filed with the SEC, the following information was disclosed.
First, on the basis of assumptions underlying the acceleration 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 ...view middle of the document...
• We will discuss the appropriate criteria for the grouping of long-lived assets to be held and used for impairment testing purposes.
• We will discuss the appropriate grouping for purposes of recognizing and measuring an impairment loss. This issue pertains to the appropriate level at which comparability is important.
• We will discuss audit considerations concerning when testing is appropriate for grouping of long-lived assets for purposes of recognition and measurement of an impairment loss.
• We will discuss whether the Company’s approach for testing goodwill for impairment after recognizing an impairment charge related to a long-lived asset group classified as held-and-used is appropriate. This issue pertains to whether it is feasible to have a long-lived asset impairment without goodwill impairment.
• We will discuss whether the Company should consider restoring the previous carrying amounts of these long-lived assets.
Section 360-10-35-17 of the Code states that an impairment loss shall be recognized if the carrying value of a fixed asset is not recoverable and exceeds its fair value. The carrying value of the fixed asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and disposal of the asset. An impairment loss shall be measured by the amount by which the carrying value exceeds the fair value.
Section 360-10-35-23 of the Code states that for the purposes of recognition and measurement of an impairment loss, fixed assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are independent of cash flows of other assets and liabilities.
Section 360-10-35-28 of the Code states that an impairment loss for an asset group shall reduce only the carrying amount of the fixed asset of the group. That loss shall be allocated to the fixed asset on a pro-rata basis using the carrying values of those assets, except that the loss allocated to the individual assets of the group shall not reduce the carrying values of that asset below its fair value whenever that fair value is measured without undue cost and effort.
Au Section 150.02 Field Work standard No 2
The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing and extent of further audit procedures.
Section 360-10-35-26 of the Code states that goodwill shall not be included in a lower-level asset group that includes only part of a reporting unit. It also states that estimates of future cash flows used to test that lower-level asset group for recoverability shall not be adjusted for the effect of excluding goodwill from the group.
Section 360-10-35-20 of the Code states that if an impairment loss is recognized, then the adjusted carrying value of...