Eagle Impairment Case

Eagle Impairment Case Question 1 IFRS According to the facts provided for Eagle in Italy, we assume that the commercial building, which represents a cash-generating unit (CGU), meets the requirement for a recoverable test under IFRS.

The impairment loss is required when the building’s book value exceeds the higher of the asset’s value-in-use and fair value less costs to sell. Carrying value 1,100 > 900 Higher of Value in use (900) Fair market value less costs to sell (800)

Impairment Loss is the difference between book value and the recoverable cost (the higher of the asset’s value-in-use and fair value less costs to sell). Carrying value 1,100 – 900 Higher of Value in use (900) Fair market value less costs to sell (800) Eagle should recognize an impairment loss of $200,000. Question 2 U. S. GAAP In this case, we make the same assumption that the building Eagle owned in Italy needs a recoverable test because of events or changes in circumstances indicate that book value may not be recoverable.

Under U. S. GAAP, the impairment loss is required when the building’s book value exceeds the undiscounted sum of the asset’s estimate future cash flows. Carrying value 1,100 ;lt; 1,150, the undiscounted future cash flows There is not impairment loss since the sum of undiscounted estimated future cash flows exceeds the book value. Question 3. 1 Because the new fair value PP;amp;E is $1,000,000, which is less than the original book value of PP;amp;E, $1,100,000.

We need to do the revaluation of PP;amp;E. Journal entry:

Revaluation loss 100,000 PP;amp;E 100,000 The new book value of the net assets of $1,300,000 (50k+1,000k+150k+300k-200k) IFRS Eagle’s Serbian CGU is the smallest identifiable group of assets that generates cash flows that are largely independent of the cash flows from other assets. The CGU is not lower than a segment. Hence, Eagle needs a recoverable test for the impairment of Goodwill. Under IFRS, there is a one-step process for measurement of impairment loss on Goodwill.

Both the recoverable amount and book value are given in the case.

The recoverable amount 1,050 < 1,300 carrying value According to the one-step process, the impairment loss is $250,000 (=1,300k-1,050k). U. S. GAAP Step 1: Recoverability. The new carrying value of net asset, $1,300,000 (50K+1,000K+150K+300K-200K) exceeds the fair value of Serbian CGU, $1,05M, the fair value of the CGU in Serbia, an impairment loss is indicated. *The fair value of PP&E is 1 million Step 2: Measurement of impairment loss.

The impairment loss is $250,000, determined as follows: Determination of implied goodwill: Fair value of CGU $1,050k* Fair value of CGU’s net assets (excluding goodwill) 1,000k** Implied value of goodwill $ 50k Measurement of impairment loss:

Book value of goodwill $ 300k Implied value of goodwill 50k Impairment loss $ 250k * Assume the $1. 05 million is the appropriate fair value under U. S. GAAP and the recoverable amount under IFRS. ** 1,000k= 50k(cash)+1,000k(PP;amp;E)+150k(Land)-200k(Liabilities), based on the assumption that the fair value of PP;amp;E is $1M and the fair value of ll individual assets and liabilities, excluding goodwill, equal their carrying amounts. Question 3.

2 The assumptions of discount rate and depreciation method are acceptable. However, the other two assumptions described as below are considered to be inappropriate. Based on paragraph 33 (c) in IAS 36, “estimate cash flow projections … based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. ” With increasing uncertainty in the future, the growth rate should be settled in a declining manner year by year.

However, in the case, the growth rates of discounted cash flows derived from Eagle’s identifiable asset demonstrated an increasing trend from 6% in 2011 to 12% in 2015.

In addition, the case indicated that external industry reports estimate no growth rate for the foreseeable, which means the average growth rate equal to 0. In the same paragraph of IAS 36, “this growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified. However, the company estimates its average future 5 years growth rate at about 8. 6%. Unfortunately, no substantial evidence can justify that the company have the capability to keep an upward growth over 5 years and outperform the external industry so well.

According to paragraph 33 (b) in IAS 36, “base cash flow projections on the most recent financial budgets/forecasts approved by management, but shall exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset’s performance. In the case, however, Eagle expected an increase in capital expenditures, which are used to modify its main product. The company incorrectly included estimated future cash outflow from improvement of its products in its measurement of value in use. Question 3. 3 The new fair value of PP;amp;E is $1,000,000 and the impairment loss is $250,000 under IFRSs.

The updated goodwill is $50,000(=$300,000-$250,000). Therefore, the new carrying value is $1,050,000 (= Cash+ PP;amp;E+ Land+ Goodwill – Liabilities = $50k+ $1,000k+ $150k+ $50- $200). Question 4

J/E 2010 1) Revaluation Loss 100,000 PP;amp;E 100,000 2) Impairment loss on goodwill 250,000 Goodwill 250,000 3) Depreciation Expense 137,500 (1,100,000/8) Accumulated depreciation 137,500 J/E 2011 1) Depreciation Expense 123,214 Accumulation Depreciation 123,214 2) PP;amp;E 150,000 Revaluation Gain 100,000 Revaluation Surplus 50,000 **Reversal of revaluation should be recognized immediately when it occurs (119 IAS 36). The impairment loss on goodwill cannot be revaluated under IFRSs. Paragraph 124 IAS 36 states that “An impairment loss recognized for goodwill shall not be reversed in a subsequent period.

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Paragraph 117 in IAS 36 states that the reversal of an impairment loss should not exceed the overall amounts of impairment loss, which have been recognized for the asset in prior periods. Therefore, the reversal of revaluation loss should $100,000 because the revaluation loss of $100,000 was recognized in the previous year. Based on paragraph 121: Reversing an impairment loss for an individual asset in IAS 36, “After a reversal of an impairment loss is recognized…. on a systematic basis over its remaining useful life. ” It means that the depreciation should be recognized in the future periods after the revaluation of assets. Therefore, we do the journal entries as above.

And the new carrying value on December 31, 2011 is $1,200K.