Rice Industries owns a manufacturing plant in a foreign country. Political unres

Question

Rice Industries owns a manufacturing plant in a foreign country. Political unrest in the country indicates that Rice should investigate for possible impairment. Below is information related to the plant's assets ($ in millions):

Book Value 190
Undiscounted sum of future est cash flows 210
Present value of future cash flows 175
Fair value less cost to sell 185

Selling Cost 5

The amount of impairment loss that Rice should recognize according to U.S. GAAP and IFRS, respectively, is:
GAAP IFRS
a. 10 m 10m
b. 15 m 15m
c. 0 10m
d. there is no impairment under both GAAP and IFRS


A. Option a

B. Option b

C. Option c

D. Option d

Explanation / Answer

There is no impairment under US GAAP as the undiscounted sum of the future net cash flows is greater than the book value of the asset. Hence, impairment loss under US GAAP is '0'.

Under IFRS, there is impairment as the BV is greater than both the fair value less cost to dispose and the PV of the cash flows. The amount of loss is BV minus the higher of the two comparable values. Hence, impairment is 190m - (185m-5m) = $10m.

Therefore, the answer is Option (C) 0 & $10m

Note: there is some ambiguity in the last two figures given, viz;

*fair value less cost to sell $185m

*selling cost $5m

I have taken that 185 is without deducting 5m. Hence, 190-(185-5) = 10m

If 185 is after deducting 5m, then impairment loss would be 190-185=$5m under IFRS. But there is not option with '0' and 5m.

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