Svitlana Bundyk - ACCN 2309 (22785) - Special Assignment #4

MEMORANDUM
TO:

John Smith

FROM:

Svitlana Bundyk

DATE:

April 17th, 2015

SUBJECT:

Impairment analysis of a plant and equipment in Des Moines, IA

Asset impairment is an excess of the carying value of the asset over the fair value it
holds (FASB, ASC 360-10-20). Given the change in economic environment in our Des
Moines location, worsened due to the loss of customers and increased competition, it is
reasonable to examine the recoverability of cash flows expected over the useful life of
the plant (FASB, ASC 360-10-35-30)and equipment assets there. (FASB, ASC 360-1035-21).
To determine if the asset is impaired, we need to perform a comparison of the carrying
value of the assets in Des Moines location to the undiscounted future cash flows
expected from the continued operation there. If the cash flows are less than the carrying
amount of the asset group, the impairment is present. (FASB, ASC 360-10-35-17)
Carrying value of the asset group = Cost of the assets Accumulated Depreciation
CV = $1,000,000 $575,000 = $425,000
Since net cash flows of $405,000 < carrying value $425,000, the impairment is present.
In order to quantify the amount of the impairment, a second test needs to be performed.
The carrying value of the PP&E at the Des Moines location needs to be contrasted to the
fair value of this asset group. The amount over which the fair value exceeds the carrying
value is the amount of impairment.
Carrying value of $425,000 fair value of $400,000 = $25,000 of impairment.
If the asset is considered impaired as of October 1st, the following journal entry will
reflect the change in the carrying value of the asset:
October 1st Loss on Impairment
$25,000
Accumulated Depreciation

$25,000

Additionally, the disclosures that will be required in the Notes to the financial
statements will include a description of the impaired asset and the circumstances in
which the impairment occurred; also, the amount of the impairment and the income
statement reflecting the loss. (FASB, ASC 360-10-35-40). The change in accounting
estimate should not be adjusted retrospectively, but only refelcted in the future periods
reporting (FASB, ASC 250-10-45-17).

Svitlana Bundyk - ACCN 2309 (22785) - Special Assignment #4

2. Sale of the asset:

If the decision is made to sell the asset, rather than write it down, the depreciation is no longer taken
out, starting on the date of the re-classification of the asset as for sale, rather than for use in
operations (FASB, ASC 360-10-35-43). Additionally, if the amount of the expected cash flows to be
produced by the asset group increases, a reversal of the impairment can be made (or a portion thereof),
up to the amount of the original impairment write-off. (FASB, ASC 360-10-35-43)
If the asset is sold by March 31st, 2014, following journal entries would reflect the sale:
October 1st

Cash
Loss on Sale
Accumulated Depreciation
Asset

$370,000
$55,000
$575,000
$1,000,000

The loss on sale of the asset group would be recorded in Other Expenses and Losses section of the
financial statements (FASB, ASC 360-10-40-5). The appropriate disclosures in the Notes to the
financial statements required in the case of a sale of the impaired asset are a the circumstances in which
the loss due to the impairment occurred, and the amount of the loss on the sale of the asset group
(FASB, ASC 360-10-35-40).

Svitlana Bundyk - ACCN 2309 (22785) - Special Assignment #4

References
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-20. Retrieved April 2, 2015, from
FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-35-17. Retrieved April 2, 2015,
from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-35-20. Retrieved April 2, 2015,
from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-35-21. Retrieved April 2, 2015,
from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-35-38. Retrieved April 2, 2015,
from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-35-40. Retrieved April 2, 2015,
from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-35-43. Retrieved April 2, 2015,
from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-35-30. Retrieved April 2, 2015,
from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 250-10-45-17. Retrieved April 2, 2015,
from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 360-10-40-5. Retrieved April 2, 2015, from
FASB Accounting Standards Codification database.