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. Operations: Ida Inc. (Ida) is a manufacturing company with operations in the United States and Spain. Ida is a U. S. subsidiary of a U. K. entity and prepares its financial statements in accordance with U. S. GAAP for reporting to its U. S. -based lender and in accordance with IFRS in reporting to its parent. Ida owns and operates a commercial building that at year-end 2010 represents a a cash-generating unit (CGU) under IFRS and a long-lived asset classified as held and used under U. S. GAAP. One of Ida’s competitors sold its commercial building for an amount significantly less than its asking price in December 2010.

The competitor’s building is located across the street from Ida’s building, has approximately the same square footage, and was built five years after Ida’s building was constructed. The following information was provided regarding Ida’s commercial building as of December 31,2010: Carrying Amount$4,500,000 Value in Use$4,000,000 Fair Market Less Cost to Sell$3,800,000 Fair Market Value $3,900,000 Undiscounted Future Cash Flows $4,200,000 ? Ida Spanish Operations: Ida acquired a smaller competing company located in Spain, and the acquisition resulted in goodwill being recorded.

Assume that (1) the activities in Spain represent the lowest level at which internal management monitors goodwill and (2) the Spanish operations represent CGU under IFRS and reporting unit under U. S. GAAP. At the end of 2009 under GAAP and IFRS the recoverable amount of the asset including goodwill exceeded its carrying amount, suggesting that the goodwill allocated to the Spanish operations was impaired. At the end of 2010 a new legislation act was passed restricting exports of Ida’s main product. The following information relates to the CGU/reporting unit of Ida’s Spanish operations before impairment analysis:

Cash$50,000 PP&E$3,000,000 Land$150,000 Goodwill$300,000 Total Assets$3,500,000 Liabilities($1,300,000) Carrying Value$2,200,000 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 resulting production decrease are impairment issues 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: Value in Use of CGU$1,800,000 Fair Value/PV of future cash flows$2,100,000 Fair Value of PP&E$3,100,000 Cost to sell CGU/reporting unit$400,000 The Fair Value of all assets and liabilities besides PP&E is equal to its carrying value. The remaining useful life of Ida’s identifiable assets is six years at the beginning of 2010 and Ida uses straight-line depreciation with no residual value. Issue 1) As of December 31, 2010, does Ida need to test the U. S. commercial building for recoverability?

If a recoverability test is needed under either US GAAP or IFRS what amount of impairment (if any) should Ida report to its U. S. -based lender and to its parent as of December 31,2010? U. S. Based Lender (GAAP) Ida should test the commercial building for impairment. A long-lived asset should be tested for impairment whenever circumstances indicate that an asset’s carrying value may not be recoverable. An example of this type of circumstance would be when there is “a significant decrease in the market price of a long-lived asset“(ASC 360-10-35-21).

If all things were equal when Ida’s competitor sold their commercial building with identical square footage for significantly less than its asking price, then Ida has enough reason to consider that the asset may be impaired. Once the building is tested for recoverability then the loss “shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset” (ASC 360-10-35-17).

Ida should measure the impairment loss as the amount that the carrying value of the building exceeds its fair value (ASC 360-10-35-17). Ida’s impairment loss for the commercial building is $600,000 (the carrying amount of the building- $4,500,000 minus its fair market value- 3,900,000). Parent Company (IFRS) * According to IAS 36. 12 Ida should test for impairment when the asset’s market value has declined. Given the information provided that the competitor’s sold their building for less than the asking price suggests to management that the fair value of the building may have declined.

An impairment loss should be reported, “If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss” (IAS 36. 59). IAS 36. 74 states that the recoverable amount of a cash? generating unit is the higher of the cash? generating unit’s fair value less costs to sell and its value in use. Ida’s recoverable amount would be its value in use of $4,000,000. Therefore Ida should report to its parent an impairment loss of $500,000 (Carrying value minus the Value in use).

Issue 2) Is goodwill associated with the Spanish operations impaired under U. S. GAAP and IFRS? What is the impairment loss associated with the asset under GAAP? What would the impairment loss and the new carrying value of the assets under IFRS be at December 31,2010? GAAP Reporting for Goodwill Impairment Under GAAP reporting rules “the first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill” (ASC 350-20-35-4).

ASC 350-20-35-6 states that if the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. Ida’s reporting unit fair value is equal to $2,100,000 and its carrying value is equal to $2,200,000 so impairment testing is required. “If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill (ASC 350-20-35-11).

The implied fair value of goodwill is the excess of the fair value of an entity over the amounts assigned to its assets and liabilities. Since the carrying values of Ida’s assets and liabilities are larger than the fair value of the company then Ida should report an impairment loss for 2010. The goodwill should be reduced by $100,000 to make the carrying value Ida’s assets and liabilities equal its fair value. IFRS Reporting for Goodwill Impairment Under IFRS reporting rules goodwill should be tested for impairment annually (IAS 36. 0). IAS 36. 104 states, “Impairment loss shall be recognized for a cash? generating unit (the smallest group of cash? generating units to which goodwill or a corporate asset has been allocated) 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 recoverable amount of the CGU is the higher of the fair value less costs to sell and its value in use (IAS 36. 74). Ida’s CGU fair value less cost to sell is equal to $1. million which is lower than the value in use, so the recoverable amount for IFRS reporting is equal to $1. 8 million. Ida must report an impairment loss because its CGU recoverable value is less than its carrying amount of $2. 2 million. The following rules are given in IAS section 36 regarding how to report the impairment loss: “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? enerating unit (group of units); and (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” (IAS 36. 104). Ida should reduce goodwill on its books by $300,000. This reduction for impairment will remove all goodwill allocated to the CGU’s books. After the adjustment for goodwill impairment loss, the new carrying value of the entity would be $1,900,000. Issue 3) Suppose that during 2011, the effects of the export laws on Ida’s Spanish operations are less dramatic than initially expected by management.

As a result, management estimates that at the end of 2011, the recoverable amount of its Spanish operations CGU/reporting unit increased to $2. 6 million. On the basis of this information and the information from Question 4, calculate the reversal of loss, if any, and the carrying value as of December 31, 2011, under (1) U. S. GAAP and (2) IFRSs. The remaining useful life of PP&E is five years at the beginning of 2011. Assume that there have been no other changes in the carrying value of other assets or liabilities during 2011. GAAP Reversal of Loss * *

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