Fair Value Measurements in
Contrast the roles of ASC 320 and ASC 820 in describing how entities should account for investments
in debt securities. What function did each topic play in providing guidance for this issue?
Testing Property, Plant, and Equipment for Impairment: Step 1
Facts: Recall NewTech Corp, the hardware manufacturing company introduced in our opening
scenario to this chapter. Let’s revisit the valuation of NewTech’s equipment, considering the following
Recall that NewTech owns specialized equipment used to produce a hardware component
for desktop computers. This equipment, having a carrying value of $10 million at 12/31/20X1 ,
represents NewTech’s only major investment in its PC hardware line, and cash flows from the
equipment are largely independent of cash flows from NewTech’s other assets. Therefore,
New Tech has concluded that the equipment, by itself, is the appropriate unit of accounting for this
asset. The equipment’s estimated useful life is 3 years, and the equipment is expected to have a
residual value of $0.5 million at that time.
As noted previously, changes in the business climate for personal computers have caused
NewTech to reassess its future cash flow projections associated with the equipment. Specifically,
the increasing market share occupied by the tablet computer market has decreased the demand
for NewTech’s hardware, and has caused NewTech to lower its earnings projections related
to sales of its hardware. Given this change in business climate and projected earnings, plant
accountants believe it is necessary to test the equipment for impairment.
1. Before we continue further into this example, take a moment to brainstorm the browse path
you would use to locate guidance on impairments of PP&E.
Assets> (ASC __ )>Overall (-10) > (-__ )
2. Also, identify the ‘1riggering event” that caused NewTech to perform this impairment test.
2. Refer back to the list of “required reading” areas identified in Chapter 2 of this book. Applying this list to ASC
820, list all areas of “required reading” a researcher should consider when researching fair value measurement
3. B1iefly summarize, then explain the significance of par. 15-1 (scope) of ASC 820-10 (Fair Value Measurement).
4. Are entities required to disclose fair value hierarchy levels for both recun-ing and nonrecurring fair value measurements?
5. B1iefly summarize par. 30-3 (initial measurement) of ASC 820-10 and provide one example listed in par. 30-3A
of an instance when transaction price may not be reflective of fair value.
Case Study 8-1
Spoiled Cheese? Recall Frankie’s Homemade Cheese Shop from the Chapter 7 cases. Assume now that Frankie’s has finished construction of the new cheese superstore along Route 5 and capitalized $1.9 million related to the project
as of the store’s opening on l/l/20Xl. As of 12/31/Xl , the current carrying value of the shop is $1.805 million (assuming a 20-year life for the store and straight-line depreciation). As of 12/31/Xl, Frankie’s notices that a few negative factors are at play and asks you whether it is required to test the superstore for impairment:
1. A key stock market index (the Dow) has slid 1,500 points, or 6% since the store was opened.
2. Monthly sales have slid by 10% since the store was opened, partially due to a construction project on Route 5 that has reduced traffic flow to the area.
3. As a result of the slide in monthly sales, the store operated at a deficit in October, November, and December of 20Xl.
Assume the fair value of the store at 12/31/Xl is $1.7 million. As of 12/31/Xl , Frankie’s estimates the store will produce net cash inflows of $50,000 in year 2, $100,000 each in years 3-5, $150,000 each in years 6-10, $175,000 each in years 11-15, and $200,000 each in years 16-20. Note that Frankie’s incremental borrowing rate is 6%.
Is the store required to be tested for impairment? Should Frankie’s impair the current ca1Tying value of the store