Rough Waters Memo

Topics: Generally Accepted Accounting Principles, Corporate finance, Asset Pages: 4 (1085 words) Published: February 13, 2014
In our recent meeting, you told us how Smooth Sailing’s business was affected by the presence of pirates in your area of operation. The pirates caused a decline in the fair market value of the cruise ship and you contacted our firm to determine how to test the ship for recoverability and the amount of impairment loss (if any). We used the Financial Accounting Standards Board’s (FASB) Accounting Standards Codifications (ASC) 360 – Property, Plant and Equipment to conduct our tests for recoverability on the cruise ship. Our analysis has helped us conclude that the value of the cruise ship has been impaired and Smooth Sailing will have to record an impairment loss of $1.6 million.

The first step is to determine whether there were any indicators of impairment of the asset. According to FASB’s Accounting Standards Codification (ASC) 360-10-35-21:

“A long lived asset 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.

b. 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.

c. A current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed off 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.”

Our analysis has helped us conclude that the presence of pirates in your area of operation has definitely caused a significant decrease in the market price of the ship. The cruise ship business has been running into losses consistently. Also, Smoot sailing does plan to sell the ship off it the business continues to...
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