Impairment under GAAP and IFRS. Price and Deadline non negotiable

Grana Enterprise Inc. Grana Enterprise Inc. (GEI) is a manufacturing company with operations in Italy and Serbia. GEI in Italy: In addition to other assets, GEI owns and operates a commercial building in Italy that is carried at its cost less any accumulated depreciation and any accumulated impairment losses. The building represents a cash-generating unit (CGU) for which the following information is available as of December 31, 2010: Building Carrying amount Value in use Fair market value less costs to sell Fair market value Undiscounted future cash flows 12/31/10 in thousands $1,100 900 800 850 1,150 GEI in Serbia: In Serbia, in 2008, GEI acquired a smaller competing company and goodwill was allocated to the CGU shown below. Activities in Serbia represent the lowest level at which internal management monitors goodwill. At the end of 2008 and 2009, the value in use of the CGU including goodwill exceeded its carrying amount. Therefore the activities of GEI in Serbia and the goodwill allocated to those activities were regarded as not impaired. However, at the end of 2010, the newly elected government passed legislation significantly restricting exports of GEI's main product. The information below relates to the CGU (which includes goodwill) of GEI's operations in Serbia before the impairment analysis is performed. For this case, assume the basis of segmentation for CGUs and reporting units (RU) is the same under IFRSs and U.S. GAAP. GEI's Serbian CGU carrying value Cash Property, plant, and equipment (PP&E) Land Goodwill Total assets Liabilities Carrying value 12/31/10 in thousands $50 1,100 150 300 $1,600 (200) $1,400 Copyright 2009 Deloitte Development LLC All Rights Reserved. Case 10-2: GE Impairment Loss Page 2 As a result of the change in legislation, GEI's production will be significantly affected for the foreseeable future. In addition, external industry reports estimate no growth rate for the foreseeable future. The significant export restriction and the resulting production decrease are impairment indicators that require GEI to estimate the recoverable amount of its operations at the end of 2010. GEI's management prepared the cash flow analysis shown below: Discounted cash flows in thousands: 2011 $5,649 6% 3,389 2,260 2012 $6,045 7% 3,627 2,418 2013 $6,528 8% 3,917 2,611 2014 $7,181 10% 4,309 2,872 2015 $8,043 12% 4,826 3,217 847 906 979 1,077 1,206 1,413 1,512 1,632 1,795 2,011 Depreciation and amortization Earnings before interest and taxes (EBIT) Available tax-loss carryforwards Net taxable earnings 564 604 652 718 804 849 0 849 908 0 908 980 0 980 1,077 0 1,077 1,207 0 1,207 Income taxes Net operating profit after-tax 296 553 317 591 342 638 377 700 422 785 564 (848) 0 $269 235 604 (903) 0 $292 222 652 (980) 0 $310 205 718 (1,077) 0 $341 195 804 (1,201) 0 $388 193 Total revenue Growth Cost of goods sold Gross profit Selling, general, and administrative (SG&A) Earnings before interest, taxes, depreciation & amortization (EBITDA) Add back depreciation and amortization Subtract capital expenditures Subtract new net working cap. Free cash flow Present value of free cash flows at 15% Total present value as of 12/31/10 $1,050 Assume the $1.05 million above is the appropriate fair value under U.S. GAAP and the recoverable amount under IFRS. Further assume management estimates no costs to sell would be incurred. The five-year business forecast prepared by management reflects an increase in the amount of capital expenditures in order to modify GEI's main product, which, when modified, will not be subject to legislation restrictions. The additional capital expenditure estimates for these investments are $450,000 and $470,000, for 2011 and 2012, Copyright 2009 Deloitte Development LLC All Rights Reserved. Case 10-2: GE Impairment Loss Page 3 respectively (included in the capital expenditures line in the calculation of present value of discounted cash flows). The amounts of capital expenditures for 2013 and 2014 also include $50,000 and $70,000, respectively for future financing outflows GEI may incur when borrowing funds for capital expenditures. The remaining useful life of GEI's identifiable assets is eight years at the beginning of 2010. GEI uses straight-line depreciation and anticipates no residual value. Management determined the discount rate used in the calculation of present value is a pre-tax discount rate of 15 percent using the weighted average cost of capital (WACC) of GEI. Required: Question 1 Given the facts provided for GEI in Italy, is the building impaired under IFRSs as of December 31, 2010, and if so, what is the amount of the impairment? Question 2 Given the facts provided for GEI in Italy, is the building impaired under U.S. GAAP as of December 31, 2010, and if so, what is the amount of the impairment? Question 3 Using the information given for GEI's CGU in Serbia, including the present value of discounted cash flow calculation, determine the following: 1. Is there an impairment loss on goodwill? If so, determine the amount of the impairment loss under IFRS and U.S. GAAP as of December 31, 2010. Assume that the fair value of PP&E is 1 million and the fair value of all other identifiable assets and liabilities, excluding goodwill, equal their carrying amounts when testing for impairment. 2. Assume that the value in use calculation is appropriate. Are management's assumptions in calculating the value in use appropriate? 3. Calculate the new carrying value of assets and CGU under IFRSs. As noted above, assume that the fair value of PP&E is 1 million and the fair value of all individual assets and liabilities, excluding goodwill, equal their carrying amounts. Question 4 Assume that during 2011, the effects of the export laws on GEI's production in Serbia are less dramatic than initially expected by management. As a result, management estimates that the recoverable amount of its Serbian CGU at the end of 2011 increased to $1,200. On the basis of this information and the information from 1-3 above, calculate the reversal of loss, if any, under IFRSs and the carrying value as of December 31, 2011. The remaining useful life of PP&E is seven years at the beginning of 2011. Assume 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