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Case B â Impairment Indicator Related to a Potential Asset Sale

An entity owns a long-lived asset group (the "Asset Group") that management evaluated for impairment indicators in the current year in accordance with ASC 360 and concluded that there were no such indicators. As part of its risk assessment procedures, the engagement team identified the following risk of material misstatement related to the valuation assertion:

The entity did not identify relevant impairment indicators related to ASC 360-10-3521(f), which states an impairment indicator may exist if there is "a current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life." The risk of material misstatement was not identified as a fraud risk.

Note that the engagement team may have identified additional risks of material misstatement related to the valuation assertion identified as part of its risk assessment procedures; however, this example focuses on this specific risk of material misstatement for illustrative purposes. The engagement team obtained the following evidence from the audit procedures performed to address this risk:

The budget used by management for operational purposes is reasonable and indicates operating income and positive cash flows for the Asset Group.

Because they are in a distressed industry, the entity and the Asset Group have experienced declines in financial results in recent years.

Management communicated to investors an intention to shift its operating strategy to improve cash flows and is exploring options and opportunities to achieve this goal.

Board meeting minutes indicate that a number of strategic options and opportunities have been discussed, including the potential sale of the Asset Group, the potential sale of other assets, and refinancing debt.

The entity projects that it will meet its financing and liquidity needs without having to sell the Asset Group or any other assets.

Management represented to the engagement team that it does not believe it is more likely than not that the Asset Group will be sold in the near future.

Question

On the basis of the case facts, determine whether managementâs assertion is supportable and how additional information obtained might change your conclusion.

User MDrabic
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Answer:

The management assertion by the management is supportable.

Step-by-step explanation:

According to ASC 360-10-35-2 a long-lived asset / an asset group needs to be tested to know if it can be recovered or not whenever any events or any changes in circumstances points out that it's carrying amount may not be recoverable. An indicator of impairment include a new event or circumstance, which has the power to significantly control the carrying value of the long-lived asset or the asset group .

Examples of indicators of impairment discussed in ASC 360-10-35-21, include the following but are not limited to:

A significant decrease in the market price of a long-lived asset or asset group

The current-period working or cash flow loss combined with a past operating or cash flow/ losses or future expection that indicates continuing losses associated with the use of a long-lived asset or asset group

A current expectation that shows more likely than not, a long-lived asset or asset group will be sold or disposed off significantly before the end of its previously estimated useful life.

Based on the above discussion, although, the entity is under distressed market conditons and is going through downward profit situation, the management can predict that it can finance or manage itself. The past records of the entity also accumulated together indicates no negative cash inflows. In addition, there exists no condition of selling any asset or the Asset group. Therefore, decision by the managemnt is supportable.

User Akshay Soam
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