Hi,
a bit puzzled with the below- where does the 13.8 mln come from?
Cheers, thanks
The following information is available for a company that prepares its financial statements in accordance with U.S. GAAP:
· It has production facilities with a net book value of $28.4 million.
· Recently, several other companies have entered the market, and the company now estimates that it will be able to generate cash flows of only $3 million per year for the next seven years with its facilities.
· The firm has a cost of capital of 10%.
The impairment loss (in $ millions) on the production facilities will most likely be reported in the company’s financial statements as a:
13.8 reduction in operating cash flows. 7.4 reduction in the balance sheet carrying amount. 13.8 impairment loss on the income statement. The company will report an impairment loss of $13.8 million on its income statement.Under U.S. GAAP the facilities fail the recoverability test–the net book value cannot be recovered from undiscounted cash flows: 7 years × $3 = $21 < $28.4. Therefore, the asset is impaired and should be written down to its fair value