Essay about Eagle Impairment Case

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Eagle Impairment Case
Question 1
According to the facts provided for Eagle in Italy, we assume that the commercial building, which represents a cash-generating unit (CGU), meets the requirement for a recoverable test under IFRS. The impairment loss is required when the building’s book value exceeds the higher of the asset’s value-in-use and fair value less costs to sell.

Carrying value 1,100 > 900 Higher of Value in use (900) Fair market value less costs to sell (800)

Impairment Loss is the difference between book value and the recoverable cost (the higher of the asset’s value-in-use and fair value less costs
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Question 3. 2
The assumptions of discount rate and depreciation method are acceptable. However, the other two assumptions described as below are considered to be inappropriate. Based on paragraph 33 (c) in IAS 36, “estimate cash flow projections … based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.” With increasing uncertainty in the future, the growth rate should be settled in a declining manner year by year. However, in the case, the growth rates of discounted cash flows derived from Eagle’s identifiable asset demonstrated an increasing trend from 6% in 2011 to 12% in 2015. In addition, the case indicated that external industry reports estimate no growth rate for the foreseeable, which means the average growth rate equal to 0. In the same paragraph of IAS 36, “this growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified.” However, the company estimates its average future 5 years growth rate at about 8.6%. Unfortunately, no substantial evidence can justify that the company have the capability to keep an upward growth over 5 years and outperform the external industry so well. According to paragraph 33 (b) in
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