Electroboy Enterprises operates several stores throughout northern Belgium and the southern part of the Netherlands. As part of an operational and financial reporting review in a response to a downturn in it markets, the company's management has decided to perform an impairment test on five stores (combined). The five stores' sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2019.
Original cost....................................................................................€36 million
Accumulated depreciation....................................................................€10 million
Estimated remaining useful life..................................................................4 years
Estimated expected future annual cash flows (not discounted).............€4.0 million per year
Appropriate discount rate.............................................................................5%
Fair value less cost of disposal..............................................................€19 million
Accounting
a. Determine the amount of impairment loss, if any, that Electroboy should report for fiscal 2019 and the carrying amount at which Electroboy should report the five stores on its fiscal year-end 2019 statement of financial position. Assume that the cash flows occur at the end of each year.
b. Repeat part (a), but instead assume that (1) the estimated remaining useful life is 10 years, (2) the estimated annual cash flows are €2,720,000 per year, and (3) the appropriate discount rate is 6%.
Analysis
Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2020 (before Electroboy closes the books on fiscal 2019). During the conference call, you learn that management is considering selling the five stores, but the sale will not likely be completed until the second quarter of fiscal 2020. Briefly discuss what implications this would have for Electroboy's 2019 financial statements. Assume the same facts as in part (b) above.
Principles
Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Suppose conditions improve in its markets. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.