Question

Electroboy Enterprises, Inc. operates several stores throughout northern Belgium and the southern part of the Netherlands. As part of an operational and financial reporting review in a response to a downturn in it markets, the company’s management has decided to perform an impairment test on five stores (combined). The five stores’ sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2015. Original cost €36 million Accumulated depreciation €10 million Estimated remaining useful life 4 years Estimated expected future annual cash flows (not discounted) €4.0 million per year Appropriate discount rate 5% Fair value less cost of disposal €23 million

Accounting

(a) Determine the amount of impairment loss, if any, that Electroboy should report for fiscal 2015 and the carrying amount at which Electroboy should report the five stores on its fiscal year-end 2015 statement of financial position. Assume that the cash flows occur at the end of each year.

(b) Repeat part (a), but instead assume that (1) the estimated remaining useful life is 10 years, (2) the estimated annual cash flows are €2,720,000 per year, and (3) the appropriate discount rate is 6%.

Analysis

Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2016 (before Electroboy closes the books on fiscal 2015). During the conference call, you learn that management is considering selling the five stores, but the sale will not likely be completed until the second quarter of fiscal 2016. Briefly discuss what implications this would have for Electroboy’s 2015 financial statements. Assume the same facts as in part (b) above.

Answer 1

a) Calculation of carrying value of five stores before impairment test:

Original cost = €36 million

Accumulated Depreciation = €10 million

Carrying value before impairment = Original cost - Accumulated Depreciaion

= 36-10 = €26 million

Calculation of value in use(in million €):

Year	Cash flows	Discounting factor @5%	Discounted cash flows
1	4.00	0.952	3.81
2	4.00	0.907	3.63
3	4.00	0.864	3.46
4	4.00	0.823	3.29
		Total	€14.19 milliion

Recoverable amount = Higher of value in use or fair value less cost of disposal

= Higher of 14.19 million or 23.00 million

= €23.00 million

Impairment loss = Carrying value - Recoverable amount

= 26 - 23

= €3.00 million

New carrying value = €23.00 million

b) Calculation of value in use:

Year	Cash flows	Discounting factor @6%	Discounted cash flows
1	2.72	0.943	2.56
2	2.72	0.89	2.42
3	2.72	0.84	2.28
4	2.72	0.792	2.15
5	2.72	0.747	2.03
6	2.72	0.705	1.92
7	2.72	0.665	1.81
8	2.72	0.627	1.71
9	2.72	0.592	1.61
10	2.72	0.558	1.52
		Total	€20.01 million

Recoverable amount = Higher of value in use or fair value less cost of disposal

= Higher of 20.01 million or 23.00 million

= €23.00 million

Impairment loss = Carrying value - Recoverable amount

= 26 - 23

= €3.00 million

New carrying value = €23.00 million

In case management is considering the selling of the five stores and the discussion is in place then the carrying value of the five stores should not be more than the amount at which the management intends to sell it.