Healthy Life Food Company acquired equipment for $42 million in 2007 for use in the manufacture of a new line of gourmet frozen foods. The equipment was estimated to have a useful life of 10 years with nil residual terminal value. After two years, in 2009, it has become apparent that the asset will only be used till 2011 and will be retired at nil salvage value. In addition, there is impairment in its carrying value currently in 2009 and it must be written down by $12,900.
The accounting treatment in such an instance has been discussed in an article by Randall W. Leucke and David T. Meeting, entitled Asset Impairment and disposal: New Accounting Guidance for long-lived Assets (Leucke and Meeting, 2002).
The article explores the manner in which the accounting profession seeks to establish a single model for all long-lived assets.
Requirement 2
The source cited above seeks to explain the treatment once an asset suffers impairment in its carrying value. It recommends that an impairment loss, if any, to be recognized shall be measured as the amount by which the carrying amount of the asset (asset group) exceeds its fair value at the balance sheet date.; FASB issued Statement no. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Financial Accounting Standards Board [FASB], August 2001, paragraph 33).
Thus Healthy Life Food Company should recognize the amount with which the asset value needs to be adjusted (i.e. $ 12,900,000) in 2009 and reflect it in the financial results of 2009.
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This would somewhat be different to the understanding of the CEO in that although the equipment’s useful life has been reduced from the initial estimate of 10 years to 5 years, Healthy Life Food Company, reported its results in 2007 and 2008 on the basis that the life of the equipment was 10 years. However, in 2009 it has recognized that the remaining life had been reduced and should account for its effect immediately in the current year.
If as stated by the CEO, the life was 5 years the depreciation that should have been charged ($8,400,000) per annum would have reported $4,200,000 less in the Earnings Before Interest and Taxes in each of the years 2007 to 2009.
