Question

ACME Drilling is evaluating an offshore oil-drilling platform for possible impairment. The company estimates the following: book value, $18.6 million; fair value, $11.7 million; sum of estimated future cash flows generated from the oil-drilling platform, $16.4 million. What amount of impairment loss, if any, should ACME record? (Enter your answer in millions rounded to 1 decimal place.)

Answer 1

Answer:

ACME Drilling should record impairment loss of $6.9 million

Explanation:

According to GAAP, when the fair value of an asset is below the net carrying amount of that asset ( Asset's historical cost - Asset's accumulated depreciation or the net book value of the asset), the Company should record it as asset impairment loss.

In ACME's case, the net book value is $18.6 million while the estimated fair value is only $11.7 million meaning that the platform is actually worth less than it is recorded on ACME's book. Thus, an impairment loss of $6.9 million should be recorded ( $18.6 million - $11.7 million) to realize the fair value of the oil-drilling platform.

The sum of projected sum of future cash flows in this case is not suitable to be used to determine the oil-drilling platform because it has not been discounted to the present value amount, and also, it is not appropriate under GAAP.