Struggling with the bolded questions
Matt Holmes recently joined Klax Company as a staff accountantin the controller's office. Klax Company provides warehousingservices for companies in several midwestern cities.
The location in Dubuque, Iowa, has not been performing well dueto increased competition and the loss of several customers thathave recently gone out of business. Matt's department managersuspects that the plant and equipment may be impaired and wonderswhether those assets should be written down. Given the company'sprior success, this issue has never arisen in the past, and Matthas been asked to conduct some research on this issue.
Instructions
If your school has a subscription to the FASB Codification, login and prepare responses to the following. Provide Codificationreferences for your responses.
a.
What is the authoritative guidance for asset impairments?Briefly discuss the scope of the standard (i.e., explainthe types of transactions to which the standardapplies).
360-10-05-4 shows that the authoritative guidance for assetimpairments provides guidance for :
-recognition and measurement of the impairment of long-livedassets to be held and used.
-measurements of the long lived-asset to be disposed of bysale
-disclosures about the impairment or disposal of long livedassets and disposals of individually significant components of anentity
b.
Give several examples of events that would cause an asset to betested for impairment. Does it appear that Klax shouldperform an impairment test? Explain.
We can find the reasons that an asset would be tested forimpairment in 360-10-35-21. They can be tested if:
-there is a large decrease in the market price of the long-livedasset
- if there is a big adverse change in the extent or manner inwhich a long-lived asset is being used or in its physicalcondition.
- A large adverse change in legal factors or in the businessclimate that could affect the value of a long-lived asset ,including an adverse action or assessment by a regulator
- An accumulation of costs significantly in excess of the amountoriginally expected for the acquisition or construction of along-lived asset
- current-period operating or cash flow loss combined with ahistory of operating or cash flow losses or a projection orforecast that demonstrates continuing losses associated with theuse of a long-lived asset
- A current expectation that, more likely than not, a long-livedasset will be sold or otherwise disposed of significantly beforethe end of its previously estimated useful life. The term morelikely than not refers to a level of likelihood that is more than50 percent.
c.
What is the best evidence of fair value? Describealternate methods of estimating fair value.
The best evidence of fair value can be found in 360-10-35-36.This states that long-lived assets that are similar inuncertainties dealing with timing amount, an expected present valuetechnique is typically the appropriate technique to estimate fairvalue.
