MEMO
To: Smooth Sailing
From: The consulting group
Date: May 6, 2012
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Subject: Recoverability/Impairment of cruise ship
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Facts:
Smooth Sailing is a private company that operates one cruise ship. Smooth Sailing’s purchase of the cruise ship was financed with nonrecourse debt. The cruise ship has its own identifiable cash flows that are largely independent of the cash flows of other asset groups. Because of an increased presence of pirates in the area in which Smooth Sailing cruises, the cruise ship’s operating performance has significantly declined, which has directly contributed to a decline in its overall fair value. Smooth …show more content…
A probability-weighted approach may be useful in considering the likelihood of those possible outcomes.” 6. ASC 360-10-35-31 states that “[e]stimates of future cash flows used to test the recoverability of a long-lived asset group shall be made for the remaining useful life of the asset group to the entity. The remaining useful life of an asset group shall be based on the remaining useful life of the primary asset of the group…the primary asset is the principal long-lived tangible asset being depreciated or intangible asset being amortized that is the most significant component asset from which the asset group derives its cash-flow-generating capacity…” 7. ASC 360-10-35-32 states that “[f]actors that an entity generally shall consider in determining whether a long-lived asset is the primary asset of an asset group include the following:
a. Whether other assets of the group would have been acquired by the entity without the asset
b. The level of investment that would be required to replace the asset
c. The remaining useful life of the asset relative to other assets of the group. If the primary asset is not the asset of the group with the longest remaining useful life, estimates of future cash flows for the group shall assume the sale of the