Effects of Idle Equipment on a Printer’s Financial Statements
LarsonAllen Principal Brenda Bijnagte advises on assessing the financial impact of unused equipment in the Printing Industry Financial Executives June 2009 newsletter,
PIFELines. The following quarterly question and answer was reprinted with permission from
PIFE.
Question of the quarter with LarsonAllen’s Brenda Bijnagte
What impact does idle equipment have on my financial statements?
Over the past six months or so, printers have closed production facilities, cut shifts, and stopped using some equipment. This excess capacity creates additional cash flow strain and liability for the company as it is still required to make lease or debt payments on the equipment, as well as increasing the ROI period.
But there may also be a hidden non-cash financial impact to consider for financial reporting purposes. Take into consideration that there is a difference between assets that are idle (temporarily not in use) versus equipment that is being held for sale or will be abandoned.
To assess the impact this may have on your business, consider the following questions based on what you know today:
- When is your company anticipating that demand will begin to grow, and when will this specific piece of equipment return to service? Will your company be providing the same solutions going forward as it has historically? While no one knows exactly how far into the recession we are or how long it will last, this will require management to consider the type of demand that will be replacing the lost sales dollars. If management intends to return this equipment to production, the assets are not considered abandoned, and you should continue to depreciate the equipment over the course of its useful life.
- How long is management willing to hold the equipment before classifying it as available for sale? What are the key factors weighing into that decision? The definition of temporary is not clearly defined, but generally should not exceed one year. Once an asset is classified as available for sale, a company should no longer depreciate that asset and remove it from the overhead pool.
- What is the fair market value of the equipment today? Compare this to what you have recorded on your financial statements. If the value today is less than the depreciated net book value, an impairment consideration should be completed and possibly recorded.
Although these adjustments are non-cash, their impact can still be significant. In addition, if you see that your company may need to take an impairment charge, it will be important to talk through this with your lender, so there are no surprises at the end of any reporting period.
For more information, contact Brenda Bijnagte at bbijnagte@larsonallen.com or 612-376-4677.