Case One: On December 31, 2020, book value of patent is 6 millions. Undiscounted sum of...

Case One:

On December 31, 2020, book value of patent is 6 millions. Undiscounted sum of future cash flows of patent is 10 millions, fair value of patent is 3 millions.

Determine the amount of any impairment loss to be recorded, if any.

(Please explain in detailes why book value is compared with the Undiscounted sum of future cash flows.)

Case Two:

Apple company acquired Banana Corporation for 60 millions on January 1st, 2020. In addition, he fair value of Goodwill is 10 millions.

An indicator is present signaling possible impairment in the end of 2020.

On December 31, 2020,

Fair value of Banana Corporation: 45million

Fair value of Banana Corporation (excluding goodwill): 39 million

Book value of Banana Corporation (including goodwill): 47 million

Determine the amount of any impairment loss to be recorded, if any.

Solutions

Expert Solution

Case One:

Book value = $6 mn

Undiscounted sum of future cash flows = $10 mn

Fair value = $3 mn

Impairment loss occurs when the recoverable value of an asset is less than its book value. Recoverable value is the higher of the fair value of the asset on that date or the sum of undiscounted cash flows from the asset on that date. So, here, recoverable amount = Higher of $10 mn and $3 mn = $10 mn.

Now, recoverable amount is higher than the book value,i.e., $6 mn. So, no impairment loss arises.

Here, book value is compared with undiscounted future cash flows because it is the higher of the two (fair value of asset today vs future cash flows from the asset). Undiscounted future cash flows would mean that the asset will generate $10 mn cash flows in the future, while the book value is only $6 mn , so the asset is worth more than its carrying cost. It doesn’t require impairment. Impairment occurs only when it is felt that the asset is worth less than the carrying value (book value).

Case Two:

Goodwill = $10 mn

Book value of Banana Corp (including goodwill) = $47 mn. This is the Carrying value of CGU (cash-generating unit Banana Corp)

Fair value of Banana Corp (Excluding goodwill) = $39 mn. This is the recoverable amount of CGU.

Since, book value of CGU (including goodwill) is more than recoverable amount of CGU, impairment loss occurs

Impairment loss = $47 mn - $39 mn = $8 mn

ekkarill92 answered 1 year ago

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