American Greetings Corporation IFRS Implementation
Property, Plant, and Equipment is the largest asset account for American Greetings, with a 2011 net balance of $241,649,000. American Greetings carries its property, plant and equipment at cost. Depreciation and amortization of buildings, equipment and fixtures are computed principally by the straight-line method over the useful lives of the various assets. The cost of buildings is depreciated over 40 years; computer hardware and software over 3 to 7 years; machinery and equipment over 3 to 15 years; and furniture and fixtures over 8 to 20 years. IFRS does permit the use of the straight-line method, resulting in a constant charge over the useful life if the asset’s residual value does not change per IAS 16. However, American Greetings would need to implement component depreciation in order to fully align its depreciation practices with international standards. Although component depreciation is permissible under GAAP, it is not often used in practice. American Greetings would need to depreciate each component of an item of property, plant and equipment separately if its cost is significant in relation to the total cost of the item. For example, American Greetings would need to depreciate its greeting card distribution plant in Danville, Kentucky, by separate components such as its roof, plumbing, and electrical systems.
In addition, American Greetings indicates that its Property, Plant, and Equipment are reviewed for impairment in accordance with ASC 360. The ASC 360 standard under US GAAP states that the test for impairment is only required if events or changes in circumstances indicate that the book value of the asset or asset group may not be recoverable. But in order to follow IFRS standards, American Greetings must assess its assets for indicators of impairment at the end of each reporting period.
American Greetings states that intangible assets with finite useful lives are amortized to their estimated residual values over such finite lives and are reviewed for impairment whenever events or circumstances arise to necessitate such a review (American Greetings, 2011). In addition, American Greetings would recognize an impairment loss for Property, Plant, and Equipment and finite life intangible assets if an asset’s book value exceeds the undiscounted sum of the asset’s estimated future cash flows. Under IFRS, American Greetings would record an impairment loss if the asset’s book value exceeds the higher of the asset’s value-in-use or fair value less cost to sell. And once the circumstances that caused such an impairment loss are resolved, American Greetings would be required to reverse out the impairment loss per IFRS. This practice is currently prohibited in US GAAP. In regards to Goodwill and intangible assets with indefinite useful lives, American Greetings evaluates their carrying value for potential impairment on an annual basis as required by ASC 350. Although this practice of annual impairment testing is in accordance with IAS 36, American Greetings is not in accordance with IFRS in regards to measurement of goodwill impairment. American Greetings is currently using the two-step process required by ASC 350: In the first step, the initial test for potential impairment, the fair value of each reporting unit is compared to its carrying amount. For 2011, American Greetings determined these fair values by using a combination of an income approach and a market based approach which was validated by market capitalization reconciliation. Based on this evaluation, it was determined that the fair values of the AG Interactive segment and UK Reporting Unit in 2011 were less than their carrying values, thus indicating potential impairment. In the second step, the measurement of the impairment, the Corporation hypothetically applies purchase accounting to the reporting units using the fair values from the first step. In order to converge with IFRS...
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