Case 10-2 Ida’s Impairment Ida Inc. (Ida) is a manufacturing company with operations in the United States and Spain. As a U.S. subsidiary of a U.K. entity, Ida prepares its financial statements in accordance with (1) U.S. GAAP for reporting to its U.S.-based lender and (2) IFRSs in reporting to its parent. U.S. Operations In addition to other assets, Ida owns and operates a commercial building in the United States that is carried at its cost less any accumulated depreciation and any accumulated impairment losses. As of December 31, 2010, the building represents: A cash-generating unit (CGU) under IFRSs. A long-lived asset classified as held and used under U.S. GAAP. In December 2010, one ...view middle of the document...
Case 10-2: Ida’s Impairment
Under U.S. GAAP, the fair value of the reporting unit, including goodwill, exceeded its carrying amount.
Therefore, the goodwill allocated to the Spanish operations was regarded as unimpaired. At the end of 2010, the newly elected government passed legislation significantly restricting exports of Ida’s main product. The information below relates to the CGU/reporting unit of Ida’s Spanish operations before the impairment analysis. Carrying Value of Ida’s Spanish Operations Before Impairment Analysis Cash Property, plant, and equipment (PP&E) Land Goodwill Total assets Liabilities Carrying value 12/31/10 (in thousands) $50 3,000 150 300 $3,500 (1,300) $2,200
As a result of the change in legislation, Ida’s production will be significantly affected for the foreseeable future. In addition, external industry reports estimate a stagnant growth rate for the foreseeable future. The significant export restriction and the resulting production decrease are impairment indicators that require Ida to estimate the recoverable amount of its operations as of the end of 2010. Ida’s management noted the following as of December 31, 2010: The value in use of the CGU is $1.8 million. The present value of future cash flows from the CGU/reporting unit is $2.1 million. The $2.1 million represents the fair value of the CGU/reporting unit. The fair value of the PP&E is $3.1 million. However, it is not possible to estimate the recoverable amount of the individual PP&E assets. The fair value of all other identifiable assets and liabilities equals their carrying value. The cost to sell the CGU/reporting unit would be $400,000.
Assume that Ida’s independent auditors reviewed the methods, significant assumptions, and related calculations for the above values and found them reliable. The remaining useful life of Ida’s identifiable assets is six years as of the beginning of 2010....