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             

Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment.

(a) Suppose conditions improve in its markets. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting

Answer 1

The carrying value of the asset is determined by deducting the accumulated depreciation from the acquisition cost of the asset. When the carrying value of the asset is over the future undiscounted cash flow that the asset is disposed is called as asset impaired.

As per the U.S. GAAPasset's impairment should be recognized when there is an evidence of the lack of recoverability of the carrying value of the asset. When the impairment of the asset is recognized it should not be restored.

Based on the carrying value of the asset the capital asset is depreciated. Thus, when the capital asset is impaired, adjust the periodic amount of depreciation. Based on the carrying value, the depreciation expemse is recalculated.