Essay about Eagle Impairment Case Study

ACTG 351
Eagle Impairment Case
Due:

Wednesday, May 4 (at the beginning of class). Also, please be prepared to discuss the case and your solution in class on this date.

Required:

Refer to the current, relevant accounting guidance to answer the four questions of the case. Please make particular note about whether the question is asking you to use U.S. GAAP, IFRS, or both.

Groups:

For this case, you will work in groups of two or three students. I will let you pick your group if you prefer, but will assign you to a group otherwise.

Please be sure to reference the applicable professional guidance listed below. Your discussion should be typed, double-spaced (quoting guidance can be single spaced) and no more than 4 pages in length. Please show your calculations for each answer.

Applicable Professional Pronouncements:
ASC 360-10, Property, Plant and Equipment: Overall (FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144))
ASC 350-20, Intangibles – Goodwill and Other: Goodwill (FASB Statement No. 142,
Goodwill and Other Intangible Assets (Statement 142))
IAS 36, Impairment of Assets (IAS 36)
NOTE: IAS 36, Impairment of Assets is posted in pdf format on Blackboard.

Instructions for accessing the FASB Codification database:
1. Go to http://aaahq.org/ascLogin.cfm
2. User ID: AAA51526
3. Password: S87u476
4. Click on link to FASB Accounting Standards Codification (from American
Accounting Association webpage)
5. Search on 360-10 and 360-20 (or access via topical drop down menu)

Case 10-2
Eagle Impairment Loss
Eagle Company (Eagle) is a manufacturing company with operations in Italy and Serbia.
Eagle in Italy:
In addition to other assets, Eagle owns and operates a commercial building in Italy that is carried at its cost less any accumulated depreciation and any accumulated impairment losses. The building represents a cash-generating unit (CGU) for which the following information is available as of December 31, 2010:
Building

12/31/10 in thousands Carrying amount
$1,100
Value in use
900
Fair market value less costs to sell
800
Fair market value
850
Undiscounted future cash flows
1,150
Eagle in Serbia:
In Serbia, in 2008, Eagle acquired a smaller competing company and goodwill was allocated to the CGU shown below. Activities in Serbia represent the lowest level at which internal management monitors goodwill. At the end of 2008 and 2009, the value in use of the CGU including goodwill exceeded its carrying amount. Therefore the activities of Eagle in Serbia and the goodwill allocated to those activities were regarded as not impaired. However, at the end of 2010, the newly elected government passed legislation significantly restricting exports of Eagle’s main product.
The information below relates to the CGU (which includes goodwill) of Eagle’s operations in Serbia before the impairment analysis is performed. For this case, assume the basis of segmentation for CGUs and reporting units (RU) is the same under IFRSs and U.S. GAAP.

Copyright 2009 Deloitte Development LLC
All Rights Reserved.

Case 10-2: Eagle Impairment Loss

Page 2

Eagle’s Serbian CGU carrying value

12/31/10 in thousands

Cash
Property, plant, and equipment (PP&E)
Land
Goodwill
Total assets
Liabilities
Carrying value

$50
1,100
150
300
$1,600
(200)
$1,400

As a result of the change in legislation, Eagle’s production will be significantly affected for the foreseeable future. In addition, external industry reports estimate no growth rate for the foreseeable future. The significant export restriction and the resulting production decrease are impairment indicators that require Eagle to estimate the recoverable amount of its operations at the end of 2010.
Eagle’s management prepared the cash flow analysis shown below:
Discounted cash flows in thousands:

Total revenue
Growth
Cost of goods sold
Gross profit
Selling, general, and administrative (SG&A)
Earnings before interest, taxes, depreciation & amortization (EBITDA)

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