Background

Banning Technology manufactures integrated circuit boards used in cell phones and computers. To take advantage of low labor costs and less restrictive environmental regulations, Banning Technology (Banning or the Company) built a plant in a little know country just east of Italy. The plant was financed with nonrecourse debt. It cost millions to build and management planned to operate it profitably for many years. Unfortunately, there has recently been a regime change in the country and new taxes and regulations have severely reduced the profitability of the plant. In fact, annual cash flows from the plant have declined by 40% and this trend is expected to continue. Management is evaluating the following possible options for proceeding into 2022 and beyond:

Continue operating the plant through the end of its useful life.

Repurpose the plant to be a distribution center and operate through the end of its useful life.

Operate the plant for two years and then turn it over to the lender which will mean a foreclosure on January 1, 2024.

The following table presents managements estimate of future cash flows from each of the alternatives. Management has also estimated how likely they are to follow alternative A or B.

		Estimated Future Cash Inflows Undiscounted (in $ millions)
Option	Probability of Occurring	2022	2023	2024	2025	2026	Total
A	30%	$1.00	$0.80	$0.70	$0.60	$0.50	$3.60
B	40%	$0.60	$0.70	$0.70	$0.70	$0.90	$3.60
C	30%	$1.10	$1.00	$2.80[1]			$4.90

[1] Includes the plants FMV of $2.8 million treated as forgiveness of debt associated with the foreclosure up to FMV of the asset.

As of December 31, 2021, the plants estimated fair value is $2.8 million, net book value is $4.2 million, and an estimated remaining useful life is five years. In addition, the net carrying value of the nonrecourse debt is $3.1 million and there is $200,000 in a bank account directly attributable to the plant.

Management has determined that an annual discount rate of 5 percent is appropriate for investments of this nature.

Required

Your firm, Barrett & Blackstone LLP, has been engaged to audit the financial statements for the year ended December 31, 2021. You believe there may be an impairment issue under ASC 360-10 and have discussed this with the audit engagement partner, Franklin Perlman.

What assets and liabilities should be included in the asset group as defined for purposes of performing the recoverability test?

How do the multiple operating scenarios impact the recoverability test?

What impact should the potential foreclosure and extinguishment of debt have on the undiscounted cash flows used to perform the recoverability test?

Describe the impairment test and whether or not recognition of impairment is required? If so, how much is the impairment write-down? Which asset will be adjusted?