Question

Matt Jones recently joined Kind Company as a staff accountant in the controller's office. Kind Company provides warehousing services for companies in several East Coast cities. The location in Philadelphia, PA, has not been performing well due to increased competition and the loss of several customers that have recently gone out of business. Matt's department manager suspects that the plant and equipment may be impaired and wonders whether those assets should be written down. Given the company's prior success, this issue has never been considered in the past, and Matt has been asked to conduct some research on this issue.

Instructions:

Access the FASB Codification via the student user name and password in Blackboard and provide codification references to support your responses.

1. What is the authoritative guidance for asset impairments? Briefly discuss the scope of the standard (i.e., explain the types of transactions to which the standard applies).
2. Give several examples of events that would cause an asset to be tested for impairment. Does it appear that Kind should perform an impairment test? Explain.
3. What is the best evidence of fair value? Describe alternate methods of estimating fair value.

Take your time, no rush! Its due over the weekend, thank you!

Answer 1

Question 1

ASC 360-10 covers impairment of tangible assets.

Scope of the standard

ASC 360-10 applies to recognized individual long-lived assets of a business enterprise and not-for-profit organizations to be held and used or to be disposed of, as well as to groups of assets, which may include assets and liabilities other than long-lived assets. However, these groups must also contain long-lived assets. Following the adoption of ASU 2016-02, lessees’ right-of-use assets, for both operating and finance leases, are subject to the impairment guidance in ASC 360-10. Note that the impairment guidance in ASC 360-10 applies to all long-lived assets, including definite-lived intangible assets, as noted in ASC 350-30

Question 2

Examples

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. The following are examples of such events or changes in circumstances:

a. A significant decrease in the market price of a long-lived asset (asset group)

b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition

c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator

d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)

e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)

f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.

The carrying amounts of fixed assets held for use and to be disposed of need to be reviewed at least annually or whenever events or changes (i.e. triggering events) in circumstances indicate that the carrying amount may not be recoverable. Here, the location in Philadelphia, PA, has not been performing well due to increased competition and the loss of several customers that have recently gone out of business. Further, Matt's department manager suspects that the plant and equipment may be impaired and wonders whether those assets should be written down. Considering these circumstances, it does appear that Kind should perform an impairment test.

Question 3:

The best evidence of fair value will be through the market approach whether it’s the principal market or the most advantageous market. The alternate methods of estimating fair value would depend on the security level.

Level 1 – Market approach

Level 2 – Income approach

Level 3 – Cost approach

Entities can use the market approach, the income approach, the cost approach, or a combination of these, as appropriate, when measuring the fair value of an asset or a liability. The valuation technique should be appropriate to the circumstances and should maximize the use of observable inputs and minimize the use of unobservable inputs. A change in valuation technique or its application is accounted for as a change in accounting estimate (which is accounted for prospectively).

Market approach

The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.

Income Approach

The income approach converts future amounts, including cash flows or earnings, to a single discounted amount to measure fair value. This method can be applied to assets or liabilities.

Cost Approach

The cost approach uses current replacement cost to measure the fair value of assets.