Accounting Rough Waters

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This case gives students an opportunity to determine the accounting for impairment of long-lived assets in accordance with ASC 360-10.

Applicable Professional Pronouncements

ASC 360-10, Property, Plant, and Equipment: Overall (ASC 360-10) ASC 360-10 provides guidance on accounting for property, plant, and equipment, and the related accumulated depreciation on those assets. This Subtopic also includes guidance on the impairment or disposal of long-lived assets. ASC 360-10 notes that long-lived tangible assets include land and land improvements, buildings, machinery and equipment, and furniture and fixtures. ASC 820, Fair Value Measurements and Disclosures (ASC 820) ASC 820, Fair Value Measurements and Disclosures,
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Further, although the case facts include an estimated annual discount rate of 7 percent, the discount rate should not be used in Smooth Sailings’ impairment analysis since undiscounted cash flows should be used in the recoverability test.

Consideration 3 — Impact of Potential Foreclosure and Extinguishment of Debt to the
Undiscounted Cash Flow Model

What impact should the potential foreclosure and extinguishment of debt have on the cash flows used to perform the recoverability test?

Discussion 2 — Impairment Loss Calculation

What impairment loss, if any, should be recorded as of December 31, 2010?

Solution 2 — Impairment Loss Calculation

| | Estimated Future Cash Flows — Undiscounted | Option | Probability of Occurring | 2011 | 2012 | 2013 | 2014 | 2015 | Total | A | Continue operating the cruise ship in the current area. | 10% | $1.0M | $0.9M | $0.7M | $0.7M | $0.7M | $4.0M | B | Operate the cruise ship in a new area where there are no pirates. | 20% | $0.6M | $0.8M | $1.1M | $1.6M | $1.9M | $6.0M | C | For 2011, operate the cruise ship in the current area despite the increased presence of pirates. On December
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