A Case Study of a Cruise Ship

1341 Words Nov 10th, 2014 6 Pages

Situation Overview
Discussion Points
Recoverability Test: Accounting Guidance
Impairment Loss Calculation: Accounting Guidance
Additional Accounting Guidance
Recoverability Test and Calculation of Impairment Loss
Alternative Analysis
Summary and Recommendations

Operates one cruise ship that is financed with nonrecourse debt.

Decline of 30% in cash flow due to presence of pirates.

Financial position as of December 31, 2010 ($ in millions)

Cruise Ship Estimated Fair Value
Net Book Value
Net Carrying Value Nonrecourse Debt
Net Working Capital (Directly Attributable)
Remaining Useful Life of Asset

5 years

Management is considering three options for the future
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◦ Estimates of future cash flows used to test recoverability shall include only future cash flows directly associated with and that are expected to arise as a result of the use and eventual disposition of the asset (360-10-35-29).

Management needs to consider if, and how much, the potential foreclosure and extinguishment of debt will impact the cash flows used to perform the recoverability test.
◦ If the asset group is tested for recoverability while it is classified as held and used, the estimates of future cash flows used in that test shall be based on the use of the asset for its remaining useful life, assuming that the disposal transaction will not occur. In such a case, an undiscounted cash flows recoverability test shall apply prior to the disposal date (360-10-404).

Based on the FASB ASC guidance listed above, there should be no impact on cash flows for purposes of the recoverability test.

reference above When a long lived asset is tested for recoverability, it also may be necessary to review depreciation estimates and methods.
Any revision to the remaining useful life shall be considered in developing estimates of future cash flows used to test the asset for recoverability (360-10-35-22).

Management must determine the impairment loss (if any). Per
FASB ASC guidance, an impairment loss shall be recognized only if the carrying amount of an asset group is not recoverable and exceeds its fair value (360-10-35-17).
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