Rough Water Ahead
MEMO
To: Smooth Sailing
From: The consulting group
Date: May 6, 2012
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Subject: Recoverability/Impairment of cruise ship
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Facts:
Smooth Sailing is a private company that operates one cruise ship. Smooth Sailing’s purchase of the cruise ship was financed with nonrecourse debt. The cruise ship has its own identifiable cash flows that are largely independent of the cash flows of other asset groups. Because of an increased presence of pirates in the area in which Smooth Sailing cruises, the cruise ship’s operating performance has significantly declined, which has directly contributed to a decline in its overall fair value. Smooth Sailings’ management is evaluating the following possible options for proceeding into 2011 and beyond:
| Option | Probability of Occurring | 2011 | 2012 | 2013 | 2014 | 2015 | Total | A | Continue operating the cruise ship in current area | 10% | $1.0M | $0.9M | $0.7M | $0.7M | $0.7M | $4.0M | B | Operate the cruise ship in a new area where there are no pirates | 20% | $0.6M | $0.8M | $1.1M | $1.6M | $1.9M | $6.0M | C | For 2011, operate the cruise ship in the current area despite the increased presence of pirates. On December 31, 2011 turn the cruise ship back to lender | 70% | $1.0M | $0 | $0 | $0 | $0 | $1.0M |
These events indicate that the carrying amount of the asset group may not be recoverable and, therefore, Smooth Sailing will test the asset group for recoverability and potential impairment in accordance with ASC 360-10 as of the end of the current fiscal year, December 31, 2010.
As of December 31, 2010, the cruise ship’s estimated fair value is $3.0 million, net book value is $4.6 million, and estimated remaining useful life is five years. In addition, the net carrying value of the nonrecourse debt is $4.0 million, there is $0.1 million of networking capital (carried at fair value) directly attributable
To: Smooth Sailing
From: The consulting group
Date: May 6, 2012
-------------------------------------------------
Subject: Recoverability/Impairment of cruise ship
-------------------------------------------------
Facts:
Smooth Sailing is a private company that operates one cruise ship. Smooth Sailing’s purchase of the cruise ship was financed with nonrecourse debt. The cruise ship has its own identifiable cash flows that are largely independent of the cash flows of other asset groups. Because of an increased presence of pirates in the area in which Smooth Sailing cruises, the cruise ship’s operating performance has significantly declined, which has directly contributed to a decline in its overall fair value. Smooth Sailings’ management is evaluating the following possible options for proceeding into 2011 and beyond:
| Option | Probability of Occurring | 2011 | 2012 | 2013 | 2014 | 2015 | Total | A | Continue operating the cruise ship in current area | 10% | $1.0M | $0.9M | $0.7M | $0.7M | $0.7M | $4.0M | B | Operate the cruise ship in a new area where there are no pirates | 20% | $0.6M | $0.8M | $1.1M | $1.6M | $1.9M | $6.0M | C | For 2011, operate the cruise ship in the current area despite the increased presence of pirates. On December 31, 2011 turn the cruise ship back to lender | 70% | $1.0M | $0 | $0 | $0 | $0 | $1.0M |
These events indicate that the carrying amount of the asset group may not be recoverable and, therefore, Smooth Sailing will test the asset group for recoverability and potential impairment in accordance with ASC 360-10 as of the end of the current fiscal year, December 31, 2010.
As of December 31, 2010, the cruise ship’s estimated fair value is $3.0 million, net book value is $4.6 million, and estimated remaining useful life is five years. In addition, the net carrying value of the nonrecourse debt is $4.0 million, there is $0.1 million of networking capital (carried at fair value) directly attributable