Ida Inc. (Ida) is a manufacturing company with operations in the United States and Spain. Ida is a U.S. subsidiary of a U.K. entity and prepares its financial statements in accordance with U.S. GAAP for reporting to its U.S.-based lender and in accordance with IFRS in reporting to its parent. Ida owns and operates a commercial building that at year-end 2010 represents a a cash-generating unit (CGU) under IFRS and a long-lived asset classified as held and used under U.S. GAAP. One of Ida’s competitors sold its commercial building for an amount significantly less than its asking price in December 2010. The competitor’s building is located across the street from Ida’s building, has approximately the same square footage, and was built five years after Ida’s building was constructed. The following information was provided regarding Ida’s commercial building as of December 31,2010:
Value in Use$4,000,000
Fair Market Less Cost to Sell$3,800,000
Fair Market Value $3,900,000
Undiscounted Future Cash Flows $4,200,000
Ida Spanish Operations:
Ida acquired a smaller competing company located in Spain, and the 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 CGU under IFRS and reporting unit under U.S. GAAP. At the end of 2009 under GAAP and IFRS the recoverable amount of the asset including goodwill exceeded its carrying amount, suggesting that the goodwill allocated to the Spanish operations was impaired. At the end of 2010 a new legislation act was passed restricting exports of Ida’s main product. The following information relates to the CGU/reporting unit of Ida’s Spanish operations before impairment analysis:
As a result of the change in legislation, Ida’s 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 and resulting production decrease are impairment issues that require Ida to estimate the recoverable amount of its operations as of the end of 2010. Ida’s management noted the following as of December 31,2010:
Value in Use of CGU$1,800,000
Fair Value/PV of future cash flows$2,100,000
Fair Value of PP&E$3,100,000
Cost to sell CGU/reporting unit$400,000
The Fair Value of all assets and liabilities besides PP&E is equal to its carrying value. The remaining useful life of Ida’s identifiable assets is six years at the beginning of 2010 and Ida uses straight-line depreciation with no residual value.
Issue 1) As of December 31, 2010, does Ida need to test the U.S. commercial building for recoverability? If a recoverability test is needed under either US GAAP or IFRS what amount of impairment (if any) should Ida report to its U.S.-based lender and to its parent as of December 31,2010?
U.S. Based Lender (GAAP)
Ida should test the commercial building for impairment. A long-lived asset should be tested for impairment whenever circumstances indicate that an asset’s carrying value may not be recoverable. An example of this type of circumstance would be when there is “a significant decrease in the market price of a long-lived asset“(ASC 360-10-35-21). If all things were equal when Ida’s competitor sold their commercial building with identical square footage for significantly less than its asking price, then Ida has enough reason to consider that the asset may be impaired. Once the building is tested for recoverability then the loss “shall be recognized only if the...