Case 820-4 Property Solutions Inc.
QUESTION 1
a. Under United States Generally Accepted Accounting Standards (U.S. GAAP), an impairment loss is recorded when the carrying value of an asset is not recoverable. Per the same standards, carrying value is not recoverable “if it exceeds the expected future cash flows to be derived from the asset on an undiscounted basis” (FASB, ASC 360-10). In the Property Solutions Inc. case, the carrying value of the building on 10/1/2017 was $1,650,000 and the expected future cash flows are $1,214,940. Per the definition of impairment loss stated above, the asset is impaired. In calculating the loss, we must compare the carrying value to the fair value of the asset. Under both ASC 820-10 of the FASB codification and SFAS No. 157, fair value is defined as “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (FASB, 2010). According to the problem statement, the fair value of the building was $1,400,000 (the price it could be sold for). Therefore, the impairment loss …show more content…
In terms of the relevance and faithful representation of impairment loss approaches, there are certainly some things to discuss. The FASB and IFRS methods both show the same level of faithful representation in that they show the effect of market change on the value of the asset by recording the impairment loss. Plus, the value of the asset being recorded is more accurate than would be found in a historical cost perspective. There is an argument, of course, that IFRS is a bit more faithfully representative because it takes into account both scenarios when the holding company is intending to continue to hold the asset or intending to sell the asset. In terms of relevance, both FASB and IFRS methods affect the decisions being made by the users of the financial statements. Since the choice to either capitalize or expense R&D costs directly affects income, which has a large impact on decision
a. Under United States Generally Accepted Accounting Standards (U.S. GAAP), an impairment loss is recorded when the carrying value of an asset is not recoverable. Per the same standards, carrying value is not recoverable “if it exceeds the expected future cash flows to be derived from the asset on an undiscounted basis” (FASB, ASC 360-10). In the Property Solutions Inc. case, the carrying value of the building on 10/1/2017 was $1,650,000 and the expected future cash flows are $1,214,940. Per the definition of impairment loss stated above, the asset is impaired. In calculating the loss, we must compare the carrying value to the fair value of the asset. Under both ASC 820-10 of the FASB codification and SFAS No. 157, fair value is defined as “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (FASB, 2010). According to the problem statement, the fair value of the building was $1,400,000 (the price it could be sold for). Therefore, the impairment loss …show more content…
In terms of the relevance and faithful representation of impairment loss approaches, there are certainly some things to discuss. The FASB and IFRS methods both show the same level of faithful representation in that they show the effect of market change on the value of the asset by recording the impairment loss. Plus, the value of the asset being recorded is more accurate than would be found in a historical cost perspective. There is an argument, of course, that IFRS is a bit more faithfully representative because it takes into account both scenarios when the holding company is intending to continue to hold the asset or intending to sell the asset. In terms of relevance, both FASB and IFRS methods affect the decisions being made by the users of the financial statements. Since the choice to either capitalize or expense R&D costs directly affects income, which has a large impact on decision