Rough Water Ahead

Required 1. How should Smooth journeys guidance perform the recoverability evidence for the cruise ship as of December 31, 2010? The following be the required steps to identify, recognize and cadency the evil of a long-lasting addition ( root) to be held and utilize * Indicators of blemish get wind whether indicators of hinderance be be. Test for recoverability If indicators be present, perform a recoverability test by comparing the sum of the estimated undiscounted future exchange in head for the hillss attri exclusivelyable to the asset ( root word) in unbelief to their carrying gets (as a reminder, entities can non record an worsening for a held and uptaked asset unless(prenominal)(prenominal) the asset graduation exercise fails this recoverability test). Measurement of an impairment If the undiscounted coin die hards exercisingd in the test for recoverability argon less than the long-lived assets (groups) carrying essence, insure the light foste r of the long-lived asset (group) and recognize an impairment disadvantage if the carrying amount of the long-lived asset (group) exceeds its decorous nurse. What assets and liabilities should be entangled in the asset group as defined by ASC 360-10 for purposes of perform the recoverability test?For purposes of apprehension and measurement of an impairment want, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable gold flows argon largely independent of the immediate payment flows of other assets and liabilities. Asset groups may include assets and liabilities outside the scope of ASC 360-10 (for example, goodwill if plastered conditions, discussed later, are met and other non-amortizing intangible assets).In general, assets should be grouped when they are used together, that is, when they are part of the same group of assets and are used together to gene pasture joint gold flows. If assets and/or liabilities are grouped for purposes of a test for recoverability, they are referred to as an ? asset group. How should the multiple operational scenarios clash the recoverability test? ASC 360-10 allows entities to use either a single-most-likely estimate of expected future coin flows (often referred to as a traditional or best-estimate approach) or a range of achievable future consequences (often referred to as a probability-weighted approach).However, if substitute(a) courses of action to recover the long-lived asset (group) are under consideration or if a range is estimated for the amount of accomplishable property flows, the likeliness of possible outcomes should be considered. An entity is non required to use the probability-weighted approach, but it may be useful in considering the likelihood of possible outcomes. If the probability-weighted approach is used, the likelihood of possible outcomes should be considered in restrain the best estimate of future cash flows. What impact should the electromotive force foreclosure and extinguishment of debt have on the cash flows used to perform the recoverability test? Generally, debt should non be included in an asset group because the lowest level of identifiable cash flows will typically not include cash flows associated with debt (i. e. , the drumhead payments associated with the debt). Further, the cash flows associated with debt principal payments are typically easy to identify therefore, most entities will be able to eliminate the cash flows associated with debt from the cash flows of other assets and liabilities.However, in high-minded instances, if the lowest level of identifiable cash flows includes cash flows associated with debt principal payments and it is not pragmatic to eliminate those cash flows (which would be to a greater extent likely to befall when the asset group is a business or reporting unit), indeed the debt should be included in the asset group (i. e. , networkted wit h the carrying amounts of the assets of the group) so as to maintain an appropriate comparison. This terra firma adjustment provides the same result as if the debt principal payments have been excluded (e. g. debt with a carrying prise of $100 would have undiscounted cash flows of $100). As a reminder, the guidance in ASC 360-10 prohibits the inclusion body of interest expense in assessing the recoverability of long-lived assets. When the FASB originally deliberated Statement 144, it considered and rejected requests for a limited exception to the fair value measurement for impaired long-lived assets that are pillowcase to nonrecourse debt. Some constituents believed that the impairment firing on an asset subject wholly to nonrecourse debt should be limited to the loss that would occur if the asset were put back to the lender.The FASB decided not to provide an exception for assets subject to nonrecourse debt. In its basis for conclusions, the FASB explained that the Recognitio n of an impairment loss and the recognition of a increase on the extinguishment of debt are separate events, and distributively event should be recognized in the period in which it occurs. The Board believes that the recognition of an impairment loss should be found on the measurement of the asset at its fair value and that the existence of nonrecourse debt should not influence that measurement. (Statement 144, paragraph B34) 2.What impairment loss, if any, should be recorded as of December 31, 2010? As discussed above, if indicators of impairment exist for an asset (group) to be held and used, an entity determines whether the sum of the estimated undiscounted future cash flows referable to the asset (group) in question is less than its carrying amount. If those undiscounted cash flows are less than the carrying amount, then an entity will recognize an impairment loss based on the excess of the carrying amount of the asset (group) over its respective fair value.However, under A SC 820 cash flows used to determine fair value (using a present value proficiency) when determining the impairment loss ( measuring rod 3) must include assumptions that grocery store histrions would use in their estimates of fair value. As a result, entities are not able to precisely chip in a discount rate to the cash flows used in Step 2 to determine fair value without first determining whether they reflect the expectations of market participants.Entities may use their own assumptions as a starting point in developing market participant assumptions and apply reasonable judgment in analyzing whether much(prenominal) assumptions are representative of market participant assumptions. The determination of market participant assumptions and their force out on fair value estimates are particularly subjective considering that the e military rank is universe made for assets to be held and used. When multiple valuation techniques are used, the merits of from each one valuation techn ique and the underlying assumptions embedded in each of the techniques should be considered in evaluating and assessing the results.In this case, we do not know the assumptions for the estimated fair value of $3. 0 zillion and we consider the discounted cash flow is more reliable. The first step is to freeze impairment indicator. Because of an increased presence of forager in the area which Smooth Sailing cruises, the cruise ships operating performance has significantly declined which has directly contributed to a decline in its overall fair value, and may indicate a potential impairment. In the second step, we did the recoverability test.The undiscounted cash flow is the sum of expected operating cash flow and the cash flow from the net working capital. Calculation is shown below We use the probability-weighted approach to get the estimated future cash flow ($2. 30) which is smaller than the net hold value. As a result, the cruise is not recoverable. In the third step, we calcu lated the impairment loss. We calculated the discounted cash flow as follow So an impairment of 2. 44 million should be recorded, which is the difference amidst the net book value of 4. million and the discounted cash flow of 2. 16 million. The expatiate counting is included in the appendix unmown water ahead. xlsx Alternate Facts Would the outcome of the recoverability and impairment tests change if the probability assessment was revised such that there was a 50 portion, 40 percent, and 10 percent probability of scenarios A, B, and C occurring, respectively? If so, how? An impairment of 0. 62 million should be recorded. The calculation is included in the attachment rough water ahead. xlsx