Eagle Impairment Case
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.
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 < 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&E is $1,000,000, which is less than the original book value of PP&E, $1,100,000. We need to do the revaluation of PP&E. Journal entry:
Revaluation loss 100,000
PP&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&E)+150k(Land)-200k(Liabilities), based on the assumption...
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