Interpreting and Applying Disclosures on Property and Equipment Following are se

Question

Interpreting and Applying Disclosures on Property and Equipment Following are selected disclosures from the Evett and Sternard Company (a specialty chemical company) 2007 10-K. Land, Building and Equipment, Net (in millions) 2007 2006 Land Buildings and improvements Machinery and equipment Capitalized interest Construction in progress Land, Building and Equipment, Gross Less: Accumulated depreciation Total $146 142 2,050 1,950 6,200 5,800 352 340 218 8,450 5,908 5,481 $3,111 2,969 271 9,019 The principa lives (in years) used in determining depreciation rates of various assets are: buildings and improvement (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10); capitalized software (5-7). The principal life used in determining the depreciation rate for leasehold improvements is the years remaining in the lease term or the useful life (in years) of the asset, whichever is shorter IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. Such circumstances would include items such as a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner the asset is being used or planned to be used or in its physical condition or a history of operating or cash flow losses associated with the use of the asset... When such events or changes occur, we assess the recoverability of the asset by comparing the carrying value of the asset to the expected future cash flows associated with the asset's planned future use and eventual disposition of the asset, if applicable .. We utilize marketplace assumptions to calculate the discounted cash flows used in determining the asset's fair value .. For the year ended December 31, 2007, we recognized approximately $24 million of fixed asset impairment charges.

Explanation / Answer

(a) Evett and Sternard is more capital intensive than the median publicly traded company.

(b) Estimated useful life = (6200+2050)/412 = 20.02 years

* Please note that only building and improvement & machinery and equipment will be considered as other assets are still in progress or non -depreciable, so they are not included.

(c) Asset used up % = Accumulated depreciation / Depreciable asset cost = 5908 / (6200+2050) = 71.61%

Objective type answer : A percentage :ncially above 50% indicates that the assets are closer to the end of their useful lives and will require replacement. Such a situation would negatively impact future cash flows.

(d) Plant assets are deemed to be impaired if their market value is less than their book value, even if temporary. We should treat these write-downs as transitory.

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