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Week 5 Case Assignment:
In a minimum of 750-words paper, respond to Case attached to this assignment page.
Ensure that your paper is organized and formatted to APA 6th edition.
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Week 7 Case
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Instructions
Week 7 Case Assignment:
In a minimum of 750-words paper, respond to Case attached to this assignment page.
Case 12-9
Rough Waters Ahead
Smooth Sailing is a private company that operates one cruise ship. Smooth Sailing’s
purchase of the cruise ship was financed with nonrecourse debt. (Nonrecourse debt is a
loan that is secured by a pledge of collateral, in this case the cruise ship, but for which the
borrower is not personally liable. If the borrower defaults, the lender can seize the
collateral, but the lender’s recovery is limited to the collateral.) 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 the ship’s overall fair value. In the current year (2010),
Smooth Sailing’s annual operating cash flows have declined by 30 percent to $1.0
million, and its annual operating cash flows are expected to continue to decline in the
near term. Because of this decline in the cruise ship’s fair value and operating
performance, Smooth Sailings’ management is evaluating the following possible options
for proceeding into 2011 and beyond:
Estimated Future Cash Inflows — Undiscounted
Option
Probability
of
Occurring
2011
2012
2013
2014
2015
Total
A
Continue operating the cruise
ship in the current area.
10%
$1.0M
$0.9M
$0.7M
$0.7M
$0.7M
$4.0M
B
Operate the cruise ship in a new
area where there are no pirates.
20%
$0.6M
$0.8M
$1.1M
$1.6M
$1.9M
$6.0M
C
For 2011, operate the cruise ship
in the current area despite the
increased presence of pirates. On
December 31, 2011, turn the
cruise ship back to the lender
(e.g., foreclosure).
70%
$1.0M
$0
$0
$0
$0
$1.0M
These events indicate that the carrying amount of the asset group may not be recoverable
and, therefore, Smooth Sailing will test the asset group for recoverability and potential
impairment in accordance with ASC 360-10 as of the end of the current fiscal year,
December 31, 2010.
As of December 31, 2010, the cruise ship’s estimated fair value is $3.0 million, net book
value is $4.6 million, and estimated remaining useful life is five years. In addition, the net
carrying value of the nonrecourse debt is $4.0 million; there is $0.1 million of net
working capital (carried at fair value) directly attributable to the cruise ship; and Smooth
Sailing has determined that an annual discount rate of 7 percent is appropriate.
Copyright 2011 Deloitte Development LLC
All Rights Reserved.
Case 12-9c: Rough Waters Ahead
Page 2
Required:
1. How should Smooth Sailings’ management perform the recoverability test for the
cruise ship as of December 31, 2010? In addressing this question, consider:
•
What assets and liabilities should be included in the “asset group” as defined
by ASC 360-10 for purposes of performing the recoverability test?
•
How should the multiple operating scenarios impact the recoverability test?
•
What impact should the potential foreclosure and extinguishment of debt have
on the cash flows used to perform the recoverability test?
2. What impairment loss, if any, should be recorded as of December 31, 2010?
Alternate Facts:
Would the outcome of the recoverability and impairment tests change if the probability
assessment was revised such that there was a 50 percent, 40 percent, and 10 percent
probability of scenarios A, B, and C occurring, respectively? If so, how?
Copyright 2011 Deloitte Development LLC
All Rights Reserved.
Case 16-8
Frozen
Ballooning Out of Control LLC (“BLOC” or the “Company”) is a manufacturer of hot air
balloons. Due to decreased demand for hot air balloons and challenging industry
conditions, BLOC’s management is exploring ways to reduce the Company’s rapidly
rising compensation and benefit costs. Management has determined it will either (1)
amend the Company’s single employer defined benefit pension plan by eliminating the
future earning of pension benefits for its employees (i.e., freeze its pension plan) or (2)
reduce headcount across the Company by 5%. Either option will require approval by
BLOC’s board of directors.
If BLOC decides to freeze its current pension plan, it will not offer any new pension
benefits to its employees through another plan. BLOC’s current pension plan is the only
retirement benefit arrangement it provides to its employees. The plan’s pension benefits
are based on years of service and average salary for the last five years of the employee’s
service period, and all employees, both hourly and salaried, who have attained six months
of service are participants in the pension plan.
Under the plan freeze, the Company will eliminate the accrual of additional pension
benefits for future service. However, the Company will continue to take future salary
increases into account in computing the average salary for the last five years before
retirement when determining the pension benefits earned for service prior to the plan
freeze. (This type of plan amendment is commonly referred to as a “soft freeze.”).
The pension plan freeze will be effective on October 1, the beginning of BLOC’s next
fiscal year, and is expected to be approved and communicated to employees prior to
BLOC’s September 30 year-end.
If BLOC’s management decides instead to reduce costs by reducing headcount by 5
percent, it anticipates that the board of directors would approve the reductions and
management would communicate its plans to the affected employees prior to September
30.
Before choosing which cost-cutting plan to recommend to the board of directors,
management would like to determine how to account for each alternative.
Required:
1. Determine how to account for each of the following alternative actions to reduce
BLOC’s increasing compensation and benefit costs:
a. Management decides to amend the pension plan by eliminating the
accrual of pension benefits for future service, while continuing to take
future salary increases into account in determining pension benefits at
retirement (i.e. a soft freeze).
Copyright 2015 Deloitte Development LLC
All Rights Reserved.
Case 20: Frozen
Page 2
b. Management decides to permanently lay off 5% of BLOC’s planeligible workforce while retaining the current pension plan.
2. What are the differences, if any, between the requirements of U.S. GAAP and
IFRSs in accounting for the two alternative actions management is considering?
Copyright 2015 Deloitte Development LLC
All Rights Reserved.
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