Rough Waters Ahead

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TrueBlood Case – Rough Waters Ahead 1. How should Smooth Sailings’ management perform the recoverability test for the cruise ship as of December 31, 2010? In addressing this question, consider: The following are the required steps to identify, recognize and measure the impairment of a long-lived asset (group) to be held and used: Step 1: Indicators of impairment — FASB ASC 360-10-35-21 “A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.” * In this case, there is a possibility of impairment because of an increased presence of pirates in the area in which Smooth Sailing cruises, the cruise ship’s operating…show more content…
ASC paragraph 360-10-35-27 states that long-term debt should be adjusted before testing the asset for recoverability” Therefore; - The cruise ship (Net Book Value) $4.6 million * Plus Net working capital $0.1 million * Total $4.7 million (NB: Nonrecourse Debt of $4.0mm is not included) • How should the multiple operating scenarios impact the recoverability test? FASB ASC 360-10-35-30 “…. However, if alternative courses of action to recover the carrying amount of a long-lived asset (asset group) are under consideration or if a range is estimated for the amount of possible future cash flows associated with the likely course of action, the likelihood of those possible outcomes shall be considered. A probability-weighted approach may be useful in considering the likelihood of those possible outcomes.” Option A: 4.0 mm x 10% = 0.4 million Option B: 6.0 mm x 20% = 1.2 million Option C: 1.0mm x 70% = 0.7 million Total = 2.3 million * In this case, $2.3million < $4.0million. There will be an Impairment Loss. • What impact should the potential foreclosure and extinguishment of debt have on the cash flows used to perform the recoverability test? Section However, in rare instances, if the lowest level of identifiable cash flows includes cash flows associated with debt principal

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