A Case Study of a Cruise Ship

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          Situation Overview Discussion Points Options Recoverability Test: Accounting Guidance Impairment Loss Calculation: Accounting Guidance Additional Accounting Guidance Recoverability Test and Calculation of Impairment Loss Alternative Analysis Summary and Recommendations Appendix 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 $3.0 $4.6 $4.0 $0.1 5 years Management is considering three options for the future •…show more content…
◦ 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. Contradicts ASC 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). The first

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