Asset Impairment Analyses

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Asset Impairment Analyses

  1. 1. ASSET IMPAIRMENT ANALYSESJennifer Goodman, CPAJuly 23, 2010
  2. 2. A LITTLE ABOUT ME THE “TROUBLED COMPANY”
  3. 3. DISCUSSION TOPICS Asset impairment analysis: Why, Where, When and How Assets held for sale Troubled Company example US GAAP vs IFRS
  4. 4. WHY: WHY SHOULD YOU TAKE A CLOSERLOOK AT ASSET IMPAIRMENT ACCOUNTING? Economic recession increases potential for impairment of assets BIG adjustments Subjective Complex calculations Audit committee inquiries NOT because of potential tax deductions
  5. 5. GOODWILL IMPAIRMENT TREND 300 18% Percentage of total population impaired 16% 250 14%Number impaired 200 12% 10% 150 8% 100 6% 4% 50 2% 0 0% 2005 2006 2007 2008 2009 Years Total Number Impaired Percentage Impaired Source : KPMG LLP “Evaluating Impairment Risk”
  6. 6. HOW DO YOU THINK THE ECONOMY WILLPERFORM OVER THE NEXT 6 MONTHS?The economy will remain the same – 34%We’re headed for a double-dip recession – 29%We’re on our way out of the recession – 19%Who knows?!? – 16%We’re headed for a strong recovery next year – 2% CPA Letter Daily – July 20, 2010 - AICPA
  7. 7. WHY: WHY SHOULD YOU TAKE A CLOSERLOOK AT ASSET IMPAIRMENT ACCOUNTING? Economic recession increases potential for impairment of assets BIG adjustments Subjective Complex calculations Audit committee inquiries NOT because of potential tax deductions
  8. 8. FAIR VALUE CONSIDERATIONS IN ASSETIMPAIRMENT“The price that would be received to sell an asset in an orderly transaction between market participants.” Level 3 internally developed estimates because markets are not observable. Need to be based on the assumptions of market participants and not the reporting entity. Entity-specific intentions should not impact the measurement of fair value unless those assumptions are consistent with the market. Most likely you will have to develop a hypothetical market for the asset.
  9. 9. WHY: WHY SHOULD YOU TAKE A CLOSERLOOK AT ASSET IMPAIRMENT ACCOUNTING? Economic recession increases potential for impairment of assets BIG adjustments Subjective Complex calculations Audit committee inquiries NOT because of potential tax deductions
  10. 10. WHERE: WHERE DO WE LOOK FOR ASSETIMPAIRMENT GUIDANCE? Long Lived Amortized Indefinite life Assets Goodwill Intangibles IntangiblesASC Topic 360-10 ASC Topic 350-20 ASC Topic 350-30 ASC Topic 350-30 SFAS No. 144 SFAS No. 142 SFAS No. 142 SFAS No. 142
  11. 11. WHEN: WHEN TO TEST FOR IMPAIRMENT? Long Lived Amortized Indefinite life Assets Goodwill Intangibles IntangiblesASC Topic 360-10 ASC Topic 350-20 ASC Topic 350-30 ASC Topic 350-30 SFAS No. 144 SFAS No. 142 SFAS No. 142 SFAS No. 142 Test if aware of Test annually for Amortize over Test annually fortrigger that could impairment useful life; test if impairment impair it aware of trigger that could impair it
  12. 12. WHEN: TRIGGERING EVENTS FORIMPAIRMENT TESTING Significant decrease in the market price of a long-lived asset. Significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition. Significant adverse change in legal factors or business climate that could affect the value of the asset. An accumulation of costs significantly in excess of the amount originally expected for the long-lived asset. Continuing losses associated with the use of the asset. Current expectation that, more likely than not, asset will be sold/disposed significantly before end of estimated useful life.
  13. 13. TROUBLED COMPANY – SHOULD LONG LIVEDASSETS BE TESTED FOR IMPAIRMENT? Sales $22M 2010  Unsigned Asset Purchase Sales $25M 2009 Agreement (APA) Sales $32M 2008 Oper Loss $500k 2010  Signed Loan Modification Oper Loss $2M 2009 Agreement conditioned on APA Oper Loss $200k 2008 Bank accepting $5M in Loan covenant violations PPE for $3M debt which haven’t been waived. Debt matures w/i 3 mo. with no current financing offers
  14. 14. HOW: HOW DO WE TEST FOR IMPAIRMENT? Long Lived Amortized Indefinite life Assets Goodwill Intangibles IntangiblesASC Topic 360-10 ASC Topic 350-20 ASC Topic 350-30 ASC Topic 350-30 SFAS No. 144 SFAS No. 142 SFAS No. 142 SFAS No. 142 Test if aware of Test annually for Amortize over Test annually fortrigger that could impairment useful life; test if impairment impair it aware of trigger that could impair it 2 steps using 2 step test using Same as long Compare fair undiscounted implied fair value lived assets value to carrying cash flow and value then fair value
  15. 15. HOW: HOW TO TEST LONG LIVED ASSETSFOR IMPAIRMENT?1. Test to determine if there is impairment.  Measure future undiscounted cash flow including disposal cost.  May have to step up in your grouping of assets to identify cash flow.  If sum of future cash flow LESS than carrying value, move on to step 2.2. Measure impairment.  Compare fair value to carrying value to measure impairment loss i.e. must use fair value guidance  Can you use discounted cash flows…possibly.
  16. 16. HOW: HOW DO WE TEST GOODWILL FORIMPAIRMENT?1. Allocate goodwill to reporting units.2. Perform “Step One” of the impairment test by comparing the reporting unit’s carrying value to fair value.3. Perform “Step Two” of the impairment test if carrying value is greater than fair value.  i.e. “Rewrite the check that you originally wrote to purchase the company.”
  17. 17. HOW: HOW DO WE TEST FINITE LIFEINTANGIBLES?Amortization tips: Amortize over period asset is expected to contribute to cash flows. Don’t automatically use straight-line amortization. The amortization method should reflect the patter the asset economic benefits are consumed. Residual value assumed zero unless market for asset.Evaluate for impairment when events and circumstances warrant.Impairment test – use long lived assets guidance.
  18. 18. HOW: HOW DO WE TEST INDEFINITE LIVEINTANGIBLES? Test annually or more frequent if triggering event. Compare fair value to carrying amount. Recognize impairment loss equal to amount of excess. Don’t forget to re-evaluate indefinite live status each reporting period.
  19. 19. TROUBLED COMPANY – SHOULD AMORTIZEDINTANGIBLE BE TESTED FOR IMPAIRMENT,AND IF SO, HOW? Customer list $750k  Intangible will be sold in Sales $100k 2010 the APA Sales $3M 2009  Gain expected on the Sales $7M 2008 APA sale, however no asset allocation schedule Trying to re-establish exists relationship with new buyers
  20. 20. ASSETS HELD FOR SALE SFAS No. 144 Do you meet the criteria? Stop depreciating or amortizing Separately state on your balance sheet Report at the lower of carrying amount or fair value less cost to sell
  21. 21. ASSETS HELD FOR SALE CRITERIA: Management commits to a plan to sell the asset. Asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets. Active program to locate a buyer and other actions required to sell the asset have been initiated. The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year. The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair. Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made.
  22. 22. TROUBLED COMPANY – ARE ASSETS HELDFOR SALE? No written plan, in  Unsigned Asset Purchase general, to sale assets Agreement (APA) Breakeven on APA and Loan Modification  Signed Loan Modification Outside looking in = sale Agreement conditioned looks probable on APA Mgmt represents = sale is Bank accepting $5M in uncertain PPE for $3M debt
  23. 23. IFRS VS GAAP IFRS may lead to need to recognize impairment of long lived assets earlier due to differences in testing models.  GAAP Two Step approach using undiscounted cash flows  IFRS One Step comparing carrying value to recoverable amount Reversal of impairments.  GAAP Reversals are prohibited  IFRS If certain criteria are met, the reversal of impairments, other than goodwill, is permitted
  24. 24. DISCUSSION TOPICS Asset impairment analysis: Why, Where, When and How Assets held for sale Troubled Company example US GAAP vs IFRS

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