system planning
Memorandum
To: Chief Executive Officer, Smooth Sailing Company
Date: 11/10/13
Re: Smooth Sailing’s Recoverability and Impairment Test
After reviewing Smooth Sailing’s case regarding how to perform the recoverability test for the cruise ship as of December 31, 2010, I recommend that your company should include the cruise ship and working capital in the “asset group”. The analysis leading us to this recommendation follows.
We based our analysis on the requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360 – Property, Plant, and Equipment. ASC 360-10-20 defines an asset group to be 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. The cruise ship creates an annual operating cash flow of 1.0 million and above. That’s why it is included in the asset group. The working capital also contributes to the asset group because it is used to purchase fuel, buy food for passengers and pay salaries so it directly relates to the ship. According to ASC 360-10-15-4b, non-recourse debt is not considered part of an asset group.
After identifying the asset group, you may consider how the multiple operating scenarios impact the recoverability test in accordance with ASC 360-10-35-30. The following table shows the possible cash flows (in millions) associated with each of the courses of action.
Option
Total Cash Flow
Probability of Occurring
Possible Cash Flow
(Probability-weighted)
A
$4.0
10%
$0.4
B
$6.0
20%
$1.2
C
$4.0
70%
$2.8
Total
$4.4
The total cash flow of option C is $4.0 million instead of $1.0 million because on December 31, 2011, Smooth Sailing will turn the cruise ship back to the lender while the estimated fair value of the ship is $3.0 million. The book value of the asset group (cruise ship + working capital) is
To: Chief Executive Officer, Smooth Sailing Company
Date: 11/10/13
Re: Smooth Sailing’s Recoverability and Impairment Test
After reviewing Smooth Sailing’s case regarding how to perform the recoverability test for the cruise ship as of December 31, 2010, I recommend that your company should include the cruise ship and working capital in the “asset group”. The analysis leading us to this recommendation follows.
We based our analysis on the requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360 – Property, Plant, and Equipment. ASC 360-10-20 defines an asset group to be 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. The cruise ship creates an annual operating cash flow of 1.0 million and above. That’s why it is included in the asset group. The working capital also contributes to the asset group because it is used to purchase fuel, buy food for passengers and pay salaries so it directly relates to the ship. According to ASC 360-10-15-4b, non-recourse debt is not considered part of an asset group.
After identifying the asset group, you may consider how the multiple operating scenarios impact the recoverability test in accordance with ASC 360-10-35-30. The following table shows the possible cash flows (in millions) associated with each of the courses of action.
Option
Total Cash Flow
Probability of Occurring
Possible Cash Flow
(Probability-weighted)
A
$4.0
10%
$0.4
B
$6.0
20%
$1.2
C
$4.0
70%
$2.8
Total
$4.4
The total cash flow of option C is $4.0 million instead of $1.0 million because on December 31, 2011, Smooth Sailing will turn the cruise ship back to the lender while the estimated fair value of the ship is $3.0 million. The book value of the asset group (cruise ship + working capital) is