Research and Analysis Case: Impairment
This is the case of the Wolfpack transport company and involves the 25 percent equity investment that they have in Maggie Valley Depot. The first section will deal directly with the guidance provided for equity method investment losses. The second will communicate whether or not Wolfpack should recognize the decline in the value of its holdings in Maggie Valley Depot. Lastly, is whether or not Wolfpack should test for impairment in regards to goodwill.
The Guidance that I would give to the Wolfpack Transport Company comes in the form of the APB opinion 18. This opinion states that the loss in value of an investment that is not a temporary decline needs be recognized (Accounting Principles Board). This is important because all of the indications show that this is not a temporary decline. Maggie Valley Depot, the investee, is unable to sustain the earnings that justify the carrying amount of the investment and thus it meets the criteria of APB 18, but it is also wise to note that this does not necessarily indicate the loss in value is not temporary and all other factors must be evaluated.
Given the information I would have to say that Wolfpack should recognize the decline in value. All of the evidence stated in the case seems strong enough to indicate that the decline is permanent. When you look at the inceasingly competitive environment, the 30 percent decline in revenues, and the fact that a plan in response to the situation has not been completed, we see good indicators that this is a permanent decline and not a temporary one.
Lastly, is the question of whether or not Wolfpack should test for impairment? I would have to say no to the testing. SFAS, 142 says the equity method investment is reviewed for impairment and not the underlying assets (CAMBRIDGE PARTNERS & ASSOCIATES, INC.). After reading this, it shows that it is decided that goodwill is not independent from related investments and thus it is not to be tested...