Case 04-3 : Home Computer, Inc.
Home computer, Inc. has 3 business segments: Computer manufacturing, printer manufacturing and retail store.
(1) computer manufacturing: Home computer will discontinue its video monitor operations at Seattle plant and establish a replacement in Sacramento. Other component parts will continue to be manufactured at the Seattle facility. The company will scrap the equipment and “special interior building configuration assets” related to the video monitor operations.
According from ASC 310-10-20 Glossary, Asset group refer as “An asset group is the unit of accounting for a long-lived asset or assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.”
Therefore, Home Computer can classify the disposal of the assets, the equipment and the “special interior building configuration assets”, as an asset group that is held and used. This is because Home Computer will continue to operate the video monitor until the facility in Sacramento is ready in 10 months. As to the changes in circumstances, according from ASC 360-10-35-21(f), Home Computer would, therefore, have to test for a long-lived asset for recoverability.
ASC 360-10-35-21 A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances:
……… f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Test for recoverability
Undiscounted future cash flows ( during 10 months period ) : $3.5 million. Asset group
Net Book Value of equipment and
the “special interior building configuration assets “ ($8) million. Net Book Value of Seattle building ($15) ($23) million. ($19.5) million
Since the carrying amount of an asset group exceed the undiscounted cash flow, it’s not recoverable . Therefore, the asset group is impaired.
ASC 310-10-35-17 An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability, whether in use (see paragraph 360-10-35-33) or under development (see paragraph 360-10-35-34). An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.
Consequently, Home Computer Inc. has to find the impairment loss by following the allocation method in ASC 360-10-35-28 and illustration ASC 360-10-55-21.
ASC 360-10-35-28 An impairment loss for an asset group shall reduce only the carrying amounts of a long-lived asset or assets of the group. The loss shall be allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its...
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