Vincent Corporation acquired an office building that it rents to a variety of small businesses. The building had an original cost of $15 million, and at the end of 20X5 it had a net book value of $11 million. Due to a change in zoning regulations effective January 20X6, Vincent believes the building has become less desirable and expects rental rates to decline. The company estimates that the fair market value of the building has decreased from $19 million to $7.5 million as a result of the zoning change. Vincent deems it necessary to review the building for possible impairment.
1. Suppose that the sum of the expected future net cash flows from the use of the building plus its eventual disposal value is estimated to be $9 million. Compute the amount of the impairment loss, if any, that Vincent should recognize on the building, assuming that Vincent prepares its financial statements using U.S. GAAP.
2. Now assume that Vincent uses IFRS. Vincent has elected historical cost as the basis of valuing its fixed assets and carries the building at a net book value of $11 million. The sum of the expected future net cash flows is estimated to be $9 million and the present value of these cash flows is $7.4 million. Vincent estimates that if it were to sell the building, it would incur a selling cost of $.1 million. Compute the impairment loss, if any, that Vincent should recognize on the building.