Question

Collison and Ryder Company (C&R) has been experiencing declining market conditions for its sportswear division. Management decided to test the assets of the division for possible impairment. The test revealed the following: book value of division’s assets, $27.5 million; fair value of division’s assets, $21.5 million; sum of estimated future cash flows generated from the division’s assets, $28.5 million. What amount of impairment loss should C&R recognize?

Answer 1

Book value = $27.5 million

Fair value = $21.5 million

Future cash flows = 28.5 million

Step 1

Asset is impaired when the undiscounted estimated future cash flows are less than the book value and

Step 2

Impairment loss = book value - fair value, which means book value is greater than fair value.

Both the above conditions needs to be satisfied for impairment.

In the given case:-

Undiscounted estimated future cash flows are greater than book value, therefore, step 1 fails.

There will be no impairment of assets

Impairment loss is zero