We are writing to you regarding the inquiry we received over the possible impairment of your cruise ship. Our response was formulated using our extensive knowledge of the U.S. Generally Accepted Accounting Principles and referring to ASC 360-10 over the testing of impairment. After preforming recoverability tests, we have concluded that your cruise ship is impaired, and an impairment loss of $1.6 million should be recorded on December 31, 2010. In the second scenario, the asset is recoverable because the expected future cash flows are greater than the carrying value; therefore, the cruise ship is not impaired. The rest of this memo will describe how we calculated the impairment on your cruise ship.
In order to test for impairment of an asset, we must first determine if there is an indicator that may indicate that the carrying amount of the asset may not be recoverable. According to ASC 360-10-35-21, an indicator is present when there is an adverse change in the extent or manner in which a long-lived asset is used or there is an adverse change in the business climate that could affect the value of a long-lived asset. Based on the information you provided us regarding the possible change in cruise ship route and economic climate due to pirates, we have concluded that there is an impairment indicator present. Due to the nature of the tourism industry, we determined that the presence of pirates is dangerous and unattractive to tourists and caused a decrease in cash flows. Operating in new areas would also cause a decrease in cash flows because of the costs of relocating and lack of experience in the new area.
After identifying the presence of an indicator of impairment, we must test the recoverability of the asset group. The cruise ship is the primary asset in the asset group, which includes your $0.1 million of working capital. Your working capital is included in the asset group for the following two reasons: it does not have cash flows