Professional judgment framework

Property, Plant and Equipment: Impairment

Background

Toyda, Inc. (Toyda) is one of the worlds leading car manufacturers. They sell cars exclusively in the US. In recent years, Toyda has begun producing electric cars, as well as specialized equipment that is used to charge electric cars. Management of Toyda had been very optimistic about this recent venture. For internal purposes, Toyda projected a growth rate of 40% for the electric car production and for the production of the specialized equipment. Management believes that these estimates were conservative. Currently, Toyda is the only carmaker in the US that is producing electric cars.

In December 2012, a number of oil reserves were discovered in Alaska. These oil reserves are much more significant than any reserves that currently exist. Consumers in the US are euphoric over these discoveries. Accordingly, many automobile manufacturing companies and industry and government analysts believe that the demand for electric cars will decrease substantially.

While the CEO is exceedingly worried about this new turn of events, she is not really worried about the financial statements for the December 31, 2012 year-end. Because Toyda is still in the early stages of producing and selling electric cars, most of the companys current net income is attributable to traditional cars. The current consensus analyst forecast for net income per share is $10.25, which equates to $30.0 million of net income. Although Toyda has not yet finalized their financial statements for 2012, the draft income statement provided to the CEO on February 1, 2013, showed net income of $35 million, an effective tax rate of 20% and total assets of $500.0 million. Toyda is audited annually.

The CFO at Toyda has been consulting with external valuation specialists since early December to determine if there is a need to impair one or both production facilities. Toyda is not considering a potential sale or an alternative use of its production facilities. The valuation specialists have extensive experience with the global automotive industry, including the electronic car industry in Europe. The valuation specialists issued their report on February 3, 2013. The report included an analysis of expected growth rates based on available market data, industry trends, historical results and other pertinent data. The report indicated that Toyda will be able to maintain their expected growth rates for two more years, until the newly discovered oil reserves are ready to begin production. Beginning in 2015, they would expect growth rates between 15% and 19% for the specialized equipment facility and the car production facility. They anticipate that Toyda will be able to dispose of the production facility for electric cars in 20 years, with proceeds of $500,000. Likewise, the production facility for the specialized equipment could be disposed of in 10 years with proceeds of $10,000. The valuation specialists also believe that the highest and best use of the facility is its current use and an expected present value technique (i.e., expected cash flows) would be the most appropriate method to make a fair value determination. The CFO has been heavy involved in the preparation and review of the valuation specialists report and she believes it is a balanced and fair assessment.

The table below provides data on the two facilities.

Asset group: production facilities	Carrying value December 31, 2012	Remaining life in years	Actual data
			Operating cash flows			Operating income
			2010	2011	2012	2010	2011	2012
Electric cars	$25,000,000	20	$45,000	$77,000	$98,000	$32,000	$43,000	$57,000
Electric car chargers	$4,000,000	10	$5,000	$19,000	$25,000	($8,000)	($15,000)	($12,000)

The following table provides the annual yield on the risk-free rate expected over the next 20 years obtained from the U.S. Department of the Treasury. The CFO has engaged in discussions with investment bankers to determine what the appropriate risk premium would be for these facilities (analyzed and supported based on market data available for comparable companies). Based on these discussions, she believes that a risk premium of 8% to 12% should be added to the risk-free rate to reflect a current discount rate.

Year	Yield*
1	0.12%
2	0.27%
3	0.40%
4	0.62%
5	0.89%
6	1.12%
7	1.41%
8	1.67%
9	1.81%
10	1.97%
11	2.05%
12	2.11%
13	2.25%
14	2.32%
15	2.45%
16	2.50%
17	2.59%
18	2.62%
19	2.65%
20	2.67%

*This represents the annual yield to maturity for each time period. Thus, for example, an investment held for 10 years would yield a 1.97% return per year.

As the junior accountant, the CFO has asked you to provide her an analysis of the need for an impairment of the production facilities and the amount of impairment loss to be recorded, if any.

Required

Reference the professional judgment framework handout and application template separately provided.

For December 31, 2012, using your judgment, perform an analysis of the need for an impairment of the production facilities and the amount of impairment loss to be recorded, if any. Using the professional judgment framework, complete the application template for all process steps and provide the appropriate information in the documentation column.

In performing your analysis, you should use an Excel spreadsheet to support any calculations.

Using the information you documented regarding the overarching considerations and the specific considerations for each process step in the framework, prepare a memorandum that you will provide to the CFO (not to exceed three pages). Be sure to include specific references to the applicable guidance and quote the applicable guidance. Also attach your excel spread sheet with your calculations. Upon completing your documentation, make certain that you are able to answer the following considerations:

Is the documentation sufficient to support your judgment?

Can another professional understand how you reached your conclusion (including why reasonable outcomes and possible alternatives identified were not selected)?