Murphy Bamboa Case

MEMORANDUM

TO: Murphy Bambao, CPA

FROM: Staff Accountant

DATE: March 28, 2013

SUBJECT: Impairment of Santa Maria Building

As you requested, I looked into the issues regarding specific write-down amount of Jalama Bay’s warehouse in Santa Maria. Recent economic conditions have made the building to experience a significant change in use. My recommendation is the building is impaired and

an impairment loss should be recorded in the amount of $2,452,927. This impairment loss is

based on ten-year lease and probability-weighted approach of 50/50 chance of lease renewal.

Jalama Bay should recognize an impairment loss based on the adjusted carrying value of

the Santa Maria building. According to the FASB (2011, ASC ¶ 360-10-35-21) long-lived assets are tested for impairment when circumstances change indicating a carrying amount

may not be re-coverable. The building was used to manufacture high-tech aquatic gear, and now the building has been leased as a warehouse. A significant change in the property’s use has occurred. First step is to test for recoverability by comparing its estimated future undiscounted cash flows with its book value. Based on FASB, 2011, the carrying amount

of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted future cash flows. The second step is the measurement of impairment loss, which is the difference

between the carrying amount of a long-lived asset and the fair value (FASB, 2011, ASC ¶

360-10-35-17 through 35-18). Please refer to the Appendix on page 2 & 3.

In both methods there is loss from impairment. In my first method my estimation is based

on sum of the future cash flows of ten-year lease. In my second method, which I would recommend, my estimation is based on sum of the future cash flows of ten-year lease, plus possible cash flows probability-weighted of 50/50 chance of lease renewal. The impairment loss for the second method is less, and it...