Murong Feng, Duy Do, TJ Fritzgerald, Hayden Jacobs
Given the facts provided for Eagle in Italy, the building is not impaired under IFRS as of December 31, 2010. The carrying value is 1,100,000, and undiscounted future cash flows are 1,150,000. The carrying value is less than undiscounted future cash flows. According to IAS36 paragraph 12, “in assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications: (d) the carrying amount of the net assets of the entity is more than its market capitalization.” Thus, there is not any impairment on the building under IFRS.
(d) The carrying amount of the net assets of the entity is more than its market capitalization” The carrying amount of net assets is 1,400,000, more than its fair value, which is 1,300,000 (due to the revaluation of PP&E). There is impairment loss on total assets.
According to IAS 36, “Compare the recoverable amount of the CGU to book value. If the recoverable amount is less, reduce goodwill first, then other assets. The recoverable amount is the higher of fair value less cost to sell and value-in-use.” The value-in-use of CGU is 1,050,000, and the fair value of CGU is 1,100,000 including goodwill. The recoverable amount is 1,100,000, less than its carrying value 1,400,000. There is an impairment loss on goodwill. The book value including goodwill of Eagle’s is 1,400,000; the recoverable amount is 1,100,000, higher of the fair value and value-in-use. Thus, an impairment amount of 1,400,000-1,100,000=300,000 is recognized.
The impairment loss is allocated on goodwill first; an impairment of goodwill is 300,000. And the remaining loss is allocated to its CGU. We do it according to IAS 36 paragraph 104 “An impairment loss shall be recognized for a cash-generating unit if, and only if, the recoverable amount of the unit (group of units) is less than the carrying amount of the unit (group of units). The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order: (a) first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit.”
2) Yes the management’s assumptions in calculating the value in use are appropriate. It is the sum of future discounted cash flows generated by operation, and it is 1,050,000.
3) The new carrying value of assets and CGU under IFRS, we assume that the fair value of PP&E is 1,000,000 and the fair value of all individual assets and liabilities, excluding goodwill, equal their carrying amounts. According to IAS 36 paragraph 104 “(b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in the unit (group of units).” Fair value of CGU, including goodwill and liability, is 1,300,000. Since there is an impairment loss on goodwill of 300,000. The new carrying value is reduced to its fair value, which is 1,300,000-300,000=1,000,000.
Question 3 (GAAP)
1) In the case, a significant change in the legal environment. We need to perform a recoverability test. According to ASC 360-10-35-21 “events or changes in circumstances indicate that the book value of the asset or asset group may...