In 2008 EcoLighting acquired a smaller competing company located in Spain, and t
ID: 2491795 • Letter: I
Question
In 2008 EcoLighting acquired a smaller competing company located in Spain, and this accuisition resulted in goodwill be recorded. Assume that (1) the activities in Spain represent the lowest level at which internal management monitors goodwill and (2) the spanish operation represent a CGU under IFRSs and a reporting unit under U.S. GAAP.
At the end of 2008 and 2009:
- Under IFRSs, the recoverable amount of the CGU, including goodwill, exceeded its carrying amount.
- Under U.S. GAAP, the fair value of the reporting unit, including Goodwill, exceeded it carrying amount.
Therefore, the goodwill allocated to the Spanish operations was regarded as unimpaired.
At the end of 2010, the newly elected government passed legislation significantly restricting exports of EcoLight's main product.
The information below relates to the CGU/reporting unit of EcoLighting's Spanish operations before the impairment analysis.
As a result of the change in legislation, EcoLighting's production will be significantly affected for the foreseeable future. In addition, external industry reports estimate a stagnant growth rate for the forseeable future. The significant export restriction and the resulting production decrease are impairment indicators that require EcoLighting to estimate the recoverable amount of its operations as of the end of 2010.
EcoLighting's management noted the following as of December 31, 2010:
-The value in use of the CGU is $1.8 million.
-The fair value of the CGU/reporting unit is $2.1 million.
-The cost to sell the CGU/reporting unit would be $400,000.
-The fair value of the PP&E assets is $3.1 million. However, it is not possible to estimate either the (1) fair value less costs to sell or (2) value in use of the individual PP&E assets.
-Both the (1) fair value and (2) value in use of all other identifiable assets and liabilities equals their carrying value. The costs to sell all other identifiable assets and liabilities is zero. Note: This bullet point pertains to Cash, Land, and Liabilities. It does not pertain to either PP&E or Goodwill.
Assume that EcoLighting's independent auditors reviewed the methods, significant assumptions, and related calculations for the above values and found them reliable.
The remaining useful life of EcoLighting's identifiable assets is six years as of the beginning of 2010. EcoLighting uses straight-line depreciation and anticipates no residual value.
Answer the following questions:
1. On the basis of the information provided, under U.S. GAAP, is goodwill associated with the Spanish operations impaired as of December 31, 2010? If so, determine the impairment loss.
2. On the basis of the information provided, under IFRS, is goodwill associated with the Spanish operations impaired as of December 31, 2010? If so, determine the impairment loss and the new carrying value of the assets and CGU under IFRS.
3. Assume that during 2011, the effect of the export laws on EcoLighting's Spanish operations are less dramatic than intially expected by management. As a result, management estimates that at the end of 2011, the recoverable amount of its Spanish operations CGU/reporting unit increased to 2.6 million. On the basis of this information and the information from questions 1 and 2, calculate the reversal of loss, if any, and the carrying value as of December 31, 2011, under (1) U.S. GAAP and (2) IFRS. The remaining useful life of PP&E is five years at the beginning of 2011. Assume that there have been no other changes in the carry value of other assets or liabilities during 2011.
Carrying value of EcoLighting's Spanish Operations Before Impairment Analysis 12/31/10 Cash $50,000 Property, Plant, and Equipment (PP&E) $3,000,000 Land $150,000 Goodwill $300,000 Total Assets $3,500,000 Total Liabilities $(1,300,000) Carrying Value $2,200,000Explanation / Answer
Answer:1 According to FASB 350-20-35--2 impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.
*implied fair value
The amount of impairment is the carrying amount of goodwill less implied fair value.
(300000-100000)=200000
Loss on impairment-goodwill $200000
To goodwill $200000
Answer:2 The value in use of the CGU is $1.8 million.
-The fair value of the CGU/reporting unit is $2.1 million.
-The cost to sell the CGU/reporting unit would be $400,000.
According to IAS 36-104 & 105 . an impairment loss is recognized if the recoverable amount is less than the carrying amount (1800<2200)
The impairment loss is first allocated to goodwill.
Any remaining loss amount is allocated to assets pro-rata on the basis of the carrying amount of each assets.
Carrying Amount=2200
Value in use =1800
Total impairment=400
Amount allocated to goodwill:300
Remaining amount:100
Loss on impairment -CGU $400000
To goodwill $300000
To PPE $95238
To Land $4762
Answer:3 (a) According to FASB 350-20-35-13 ,GAAP does not allow the reversal of a goodwill impairment.
(b) According to IAS 36-122 &123, a goodwill impairment loss cannot be reversed in a subsequent period.However the remaining impairment should be allocated prorata to the rest of the assets.
Prorata carrying value of the assets:
2011 Recoverable amount 2600
Less: 2011 carrying amount 1219
Remaining amount 1381
A reversal of impairment loss on a revalued asset is recognized is an increase in the revaluation surplus account.However, we can only recognised the reversal of an impairment loss as profit to the extent of that we recognized a loss on the intial impairment.[IAS 36-119 $120]
PPE $1299894
LAnd $81106
To revaluation surplus $1281000
To gain on revaluation $100000
Particulars Carrying value (in thousands) Fair value (in thousands) Cash 50 50 PPE 3000 3100 Land 150 150 Goodwill 300 *100 Total assets 3500 3400 Liabilities -1300 -1300 Carrying value 2200 2100Related Questions
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