Your Questions About An Impaired Asset

July 30, 2012
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Daniel asks…

Accounting, true or false statement!?

1. If market value of an impaired asset recovers after an impairment has been recognized, the impairment may be reversed in a subsequent period. TRUE or FALSE?

2. Contra accounts must be reported for intangible assets in a manner similar to accumulated depreciation and property, plant, and equipment. TRUE or FALSE?

admin answers:

1. Partly true. You can reverse an impairment loss for an individual asset or a cash generating unit , but not for goodwill.
IAS 36.114. An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If this is the case, the carrying amount of the asset shall, except as described in paragraph 117, be increased to its recoverable amount. That increase is a reversal of an impairment loss.
117. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.
124. An impairment loss recognised for goodwill shall not be reversed in a subsequent period.

2. True. Intangible assets are reported less accumulated impairment losses.

Charles asks…

how would you edit this economic report on banks?

at leat to 2 paragraphs.
The fight for who would win Wachovia – Citigroup or Wells Fargo – heated up Sunday night. New York State Supreme Court Justice Charles Ramos had issued an order late Saturday that temporarily blocked the merger of Wachovia with Wells Fargo.
Wachovia responded Sunday with lawsuits of its own. In a Sunday night ruling, the Appellate Division of State Supreme Court threw out the order by Ramos, the Associated Press reported. Citigroup said it would appeal the decision. In a deal struck last Monday with the assistance of the Federal Deposit Insurance Corporation (FDIC), Citigroup had offered to take over Wachovia’s banking operations for $2.2 billion. The deal did not include Wachovia’s asset-management or retail-brokerage units. Four days later, Wells Fargo said it was buying all of Wachovia for approximately $15.1 billion in stock.The battle also has implications for taxpayers.
The Citigroup offer had come with a backstop from the FDIC, which would cover any losses on Wachovia’s $300 billion loan portfolio beyond the first $42 billion. The Wells offer does not ask for FDIC assistance. In a statement on Sunday, Wachovia said the company believes its agreement with Wells Fargo is “proper, valid and … in the best interest of shareholders, employees as well as the American taxpayers.” Citigroup is free to make a better offer to Wachovia under that agreement, the statement said.
The fight was also waged in federal court, where Wachovia asked U.S. District Judge John Koeltl to declare invalid part of the Citigroup deal that would have restricted Wachovia from considering competing bids. Koeltl scheduled another hearing for Tuesday so Citigroup could respond.
It was clear from documents filed in federal court Sunday that Wachovia was in considerable trouble when it agreed to the deal, the AP reported. Wachovia disclosed that it agreed to the deal “with the understanding that a seizure of its banking assets later that day by the FDIC would occur” unless it accepted Citigroup’s proposal.
As of Friday, Citigroup still had support of industry regulators. “The FDIC stands behind its previously announced agreement with Citigroup,” Federal Deposit Insurance Corporation Chairman Sheila Bair said in a statement, adding that it would pursue a resolution with all three companies. An FDIC spokesman did not immediately return calls for comment on Sunday, the AP said.
If Citigroup wins, it would represent a huge step forward for the company’s retail banking aspirations, whose footprint has lagged many of its biggest rivals. Investors cheered Citigroup’s decision last week to buy Wachovia’s banking assets. But some observers had wondered whether Citigroup could pull off the deal since it is in the process of a major restructuring after posting close to $18 billion in losses over the past three quarters.
The tie-up, however, comes at a cost for Wells Fargo. The company said it expected to incur about $10 billion in merger related costs. It said it would also record Wachovia’s impaired assets at fair value, which could bring further writedowns.
In the last month alone, the nation’s banking industry has undergone a dramatic facelift, including the failure of Washington Mutual and its subsequent purchase by JPMorgan Chase, as well as Bank of America’s acquisition of Merrill Lynch

admin answers:

The New York Times has had a series of articles about this subject. Either you are a superb economic student or you are a newspaper reporter. I didn’t find one editing error; not even a missplaced comma..

Sandy asks…

How do asset impairments effect the cash flow statement?

If land or houses built and in inventory are impaired and “written down” to mkt value which reduces profit on the P&L as an expense or charge, why does this figure end up as an increase on the cash flow statement?

Its a non-cash event is it not? Example: if you write down the value of land and a house (you’re a builder) for $50,000 due to fallen prices, why does this $50,000 charge end up as an increase to the cash account and improve the cash flow statement?

Obviously, I’m not an accountant and this seems very counter intuitive. If what I described is correct, you do not have an additional $50,000 in your bank account to spend.

What am I missing?

admin answers:

You are looking at an indirect income statement. The indirect method begins with Net Income, and works backwards to get to cash flow, as opposed to the direct method, which lists out all sources and uses of cash.

You are correct in that the 50k charge shows up on the income statement as part of net income. You are also correct that it is a non-cash event.

So your net income has a 50k reduction to it that isn’t also a reduction in cash. In order to go from NI to CFO, then, you have to add that 50k back.

Simple example: The only thing the firm does in the year is write down that 50k – it does nothing with cash at all. So it’s net income is (50,000) (ignore taxes), and its operating section of the statement of cash flows looks like this:

NI:……………………………………………………………………. (50,000)
+ Asset Impairment …………….50,000
Cash flows from Operations ……….. 0

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