ACCOUNTING, ANALYSIS, AND PRINCIPLES Accounting (a) Undiscounted future cash flows = (4 years X $4 million per year) = $16 million Book value = $36 million – $10 million = $26 million $16 million < $26 million; the impairment test suggests an impairment charge is necessary. Estimated fair value = ($4 million X PVF-OA4,5%) = ($4 million X 3.54595) = $14,183,800 Impairment charge = $26,000,000 – $14,183,800 = $11,816,200 Post-impairment book value = $14,183,800 (b) Undiscounted future cash flows = (10 years X $2.72 million per year) = $27.2 million Book value = $36 million – $10 million = $26 million $27.2 million > $26 million; the impairment test suggests no impairment charge is necessary. Book value at fiscal year-end = $26 million. Analysis If the stores are in the process of being sold, they would likely be considered ‘held for sale’ for financial reporting purposes. If they are held for sale, the impairment test is based on the discounted cash flows, instead of undiscounted. Essentially, it is a lower-of-cost-or-market approach. Estimated fair-value = ($2.72 million X PVF-OA10,6%) = ($2.72 million X 7.36009) = $20,019,445 Therefore, Electroboy will need to write the stores down to $20,019,445 from $26 million. Fixed asset writedowns are a little more likely when management intends to sell the assets. 11-69 ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued) Principles Under GAAP, once an asset is written down to an impairment value, it cannot be subsequently written back up. This provision is based in part on conservatism, as well as concerns about the reliability of measurements for the revaluations upward, following impairment. Note that if the assets are held-for-sale, the assets can be written back up (no higher than original historical cost). LO: 3, 5, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Measurement, Reporting, Research, AICPA PC: Communication 11-70