Rough Waters Ahead
1. How should Smooth Sailings’ management perform the recoverability test for the cruise ship as of December 31, 2010? In addressing this question, consider:
The following are the required steps to identify, recognize and measure the impairment of a long-lived asset (group) to be held and used:
Step 1: Indicators of impairment — FASB 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.”
In this case, there is a possibility of impairment 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.
Step 2: Test for recoverability
“If indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset (group) in question to their carrying amounts “
In this case, $2.3million < $4.0million
Step 3: Measurement of an impairment
“If the undiscounted cash flows used in the test for recoverability are less than the long-lived asset’s (group’s) carrying amount, determine the fair value of the long-lived asset (group) and recognize an impairment loss if the carrying amount of the long-lived asset (group) exceeds its fair value.”
• What assets and liabilities should be included in the “asset group” as defined by ASC 360-10 for purposes of performing the recoverability test?
FASB ASC 360-10-35-23
“For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. However, an impairment loss, if any, that results from applying