Question

Carlson Markets, Ltd. owns a chain of specialty stores in the Mid-Atlantic Region. Recently, ten of the stores have experienced declining profits due a decline in business, which has been further ravaged by the effects of the Covid 19 Pandemic. As a result, and although the extent of the length of the downturn in business activity is difficult to predict, as is the return to more normal business levels, Carlson's leadership team assembled data about possible impairment of the assets of the stores. The information gathered was as follows:


Book value: $17.5 million
Fair value: $14.9 million
Undiscounted sum of future cash flows: $18.2 million


Required:
Determine the amount, if any, of the impairment loss that Carlson must recognize on these assets. (Enter your answer in millions (i.e., 5,000,000 should be entered as 5).)
  

Answer 1

No impariment loss is to recognsied as the book value of asset is fairly recoverable in future years

Explanation

Under U.S. GAAP, the most vital  source is ASC 360-10, that  regulates the impairment of tangible assets. The impairment of assets is treated as follows:

• U.S. GAAP has a two-step test to determine if the asset is impaired or not.
  • The first step is defined as the recoverability test in which the book value of the asset is tested. The book value of the asset is not recoverable when it is higher than the undiscounted cash flows expected from the continuous use of the asset.
  • The second step is defined as the measurement of impairment loss. If the asset’s value is proven to be unrecoverable in the first step, then the impairment loss is calculated. Impairment loss = asset’s book value – asset’s fair value (or the present value of the future cash flows expected).
• Companies are advised to carry out the impairment test only when they are sure that the asset’s carrying/book value cannot be recovered permanently.

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