Case Study: Rough Water Ahead
Case study: Rough Waters Ahead
1. Assuming Smooth Sailing uses US GAAP to prepare its financial statements, how should Smooth Sailings' management perform the recoverability test for the cruise ship as of December 31, 2010? In addressing this question, consider:
a. What assets and liabilities should be included in the asset group" for purposes of performing the recoverability test?
Ans.:
According to FAS 144.41, "Component of an entity" describes operations and cash flows that can be clearly distinguished from the reminder of the entity, both operationally and for financially reporting purposes. A component of an entity may be an operating segment (as defined in FAS 131), a reporting unit (as defined in FAS 142). From the information given by the case, the cruise ship has its own identifiable cash flows that are largely independent of the cash flows of other asset groups. Therefore, each cruise ship can be classified as "Component of an entity".
An entity should also assess whether there is any indication that an "Component of an entity" may impair. If any such indication exists, the entity should estimate the asset's recoverable amount. The recoverable amount can be calculated as the higher of net selling price (value if sold) and value in use (prevent value of discounted expected future cash flows). Also, the operations and cash flows of the cruise ship must fulfill the following conditions.
1. The operations and cash flows of the cruise ship have been (or will be) eliminated from the ongoing operations of the entity following the disposal
2. The cruise ship will not have significant continuing involvement in the operations after disposal.
From the information given, Smoothing Sailing fulfill the above two conditions.
Since Smoothing Sailing can calculated the estimated future cash flow, this can be used in performing the recoverability test.
For liabilities, the cruise ship is financed with nonrecourse debt. If the borrower
1. Assuming Smooth Sailing uses US GAAP to prepare its financial statements, how should Smooth Sailings' management perform the recoverability test for the cruise ship as of December 31, 2010? In addressing this question, consider:
a. What assets and liabilities should be included in the asset group" for purposes of performing the recoverability test?
Ans.:
According to FAS 144.41, "Component of an entity" describes operations and cash flows that can be clearly distinguished from the reminder of the entity, both operationally and for financially reporting purposes. A component of an entity may be an operating segment (as defined in FAS 131), a reporting unit (as defined in FAS 142). From the information given by the case, the cruise ship has its own identifiable cash flows that are largely independent of the cash flows of other asset groups. Therefore, each cruise ship can be classified as "Component of an entity".
An entity should also assess whether there is any indication that an "Component of an entity" may impair. If any such indication exists, the entity should estimate the asset's recoverable amount. The recoverable amount can be calculated as the higher of net selling price (value if sold) and value in use (prevent value of discounted expected future cash flows). Also, the operations and cash flows of the cruise ship must fulfill the following conditions.
1. The operations and cash flows of the cruise ship have been (or will be) eliminated from the ongoing operations of the entity following the disposal
2. The cruise ship will not have significant continuing involvement in the operations after disposal.
From the information given, Smoothing Sailing fulfill the above two conditions.
Since Smoothing Sailing can calculated the estimated future cash flow, this can be used in performing the recoverability test.
For liabilities, the cruise ship is financed with nonrecourse debt. If the borrower