10-2 Idas Case 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 of Idas competitors sold its commercial building for an amount significantly less than its asking price. The competitors building is located across the street from Idas building, has approximately the same square footage, and was built five years after Idas building was constructed. In preparing its 2010 financial statements, Idas management has provided the following information regarding the building as of December 31, 2010 (assume these values have been evaluated by Idas independent auditor and found to be reliable): Idas Building 12/31/10 (in thousands) Carrying amount $4,500 Value in use $4,000 Fair market value less cost to sell $3,800 Fair market value $3,900 Undiscounted future cash flows $4,200 Spanish Operations In 2008, Ida acquired a smaller competing company located in Spain, and this 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 a CGU under IFRSs and a reporting unit under U.S. GAAP. At the end of 2008 and 2009: Under IFRSs, the recoverable amount of the CGU, including goodwill, exceeded its carrying amount. Copyright 2009 Deloitte Development LLC All Rights Reserved. Case 10-2: Idas Impairment Page 2 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 Idas main product. The information below relates to the CGU/reporting unit of Idas Spanish operations before the impairment analysis. Carrying Value of Idas Spanish Operations Before Impairment Analysis 12/31/10 (in thousands) Cash Property, plant, and equipment (PP&E) Land Goodwill Total assets Liabilities Carrying value $50 3,000 150 300 $3,500 (1,000) $2,500 As a result of the change in legislation, Idas 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 the and resulting production decrease are impairment indicators that require Ida to estimate the recoverable amount of its operations as of the end of 2010. Idas management noted the following as of December 31, 2010: The value in use of the CGU is $2.1 million. The present value of future cash flows from the CGU/reporting unit is $2.0 million. The $2.0 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 $100,000. Assume that Idas independent auditors reviewed the methods, significant assumptions, and related calculations for the above values and found them reliable. The remaining useful life of Idas identifiable assets is six years as of the beginning of 2010. Ida uses straight-line depreciation and anticipates no residual value. Copyright 2009 Deloitte Development LLC All Rights Reserved. Case 10-2: Idas Impairment Page 3 Required: Question 1 As of December 31, 2010, does Ida need to test the U.S. commercial building for recoverability under (1) U.S. GAAP and (2) IFRSs? Question 2 If a recoverability test is needed under U.S. GAAP, what amount of impairment (if any) should Ida record on the U.S. commercial building when reporting to its U.S.-based lender as of December 31, 2010? Question 3 If a recoverability test is needed under IFRSs, what amount of impairment (if any) should Ida record on the U.S. commercial building when reporting to its parent as of December 31, 2010? Question 4(a) On the basis of the information provided, under U.S. GAAP, is goodwill associated with the Spanish operations impaired as of December 31, 2010? If so, determine the impairment loss. Question 4(b) On the basis of the information provided, under IFRSs, is goodwill associated with the Spanish operations impaired as of December 31, 2010? If so, determine the impairment loss and the new carrying value of the assets and CGU under IFRSs. Question 5 Assume that during 2011, the effects of the export laws on Idas 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. Copyright 2009 Deloitte Development LLC All Rights Reserved