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Effects of piracy on cruise ships' business

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  1. Recoverability test
  2. Impairment loss

Smooth Sailing, a private cruise ship company, has seen a decline in performance due to an increased presence of pirates in the area in which it cruises. This has contributed significantly to the decline of its overall sales value and presently it has seen a decline of about 30 percent of its total operating value to $1M which is expected to continue to decline in the near term. Because the all the possible option for proceeding into the next term indicate that the caring amount the caring amount of assets is not recoverable, Smooth Sailing is expected to test the asset group for recoverability and potential impairment as of the end of the current fiscal year.

[...] In this case the company is expected to include the estimated fair value of the cruise ship which is $ 3.0 million and the $ 0.1 M of the net working capital that is directly attributed to the cruise ship as the assets in the recoverability test. According to ASC 360-10 it is not often advisable to include debts as an asset group because the lowest identifiable cash flow will not include cash flow that is associated with debts (Fischer & Tayler, 2007). Therefore,the non-recourse debt of $ 4.0 M will not be included in the asset group. [...]

[...] This decision will ensure that it incur much less impaired loss as compared to adopting the other two options. References Ernest, L. & Young, P.(2011). ?Impairment or disposal of long lived assets?. Financial ReportingDevelopment 9-31. Fischer, P. & Tayler, W. (2007). Fundamental of Advanced Accounting. [...]

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