Discuss the key financial reporting issues in relation to the two option regarding the impairment of production facilities.
Case Impairment
Panoramic Equiptindo Company Limited (PE) is an experienced original equipment manufacturing (OEM) in cameras. However, it focuses on film camera production while its production of compact digital camera (CDCs) accounts for only 10% of its production. PE realises that the market for traditional film camera is declining in terms of demand and profit margin because costumers are shifting to digital camera. In view of the market sentiment, PE is considering the following two options:
Option 1: Upgrading as an OEM manufacturer for consumer CDCsFollowing this option, PE would need to invest at least $40 million to replace its existing production facilities to meet costumer requirements. Panoramic Equiptindo would remain principally an OEM manufacturer for costumer CDCs of major brands.
Option 2: Becoming an original brand manufacturer (OBM) for budget CDCs for the PCR using the “Marvelous” brand.
Following this option. Panoramic Equiptindo could retain its manufacturing facilities with minimum modification at a cost of approximately $10 million. However substantial expenditure would be needed to develop the Company’s brand name “Marvelous” in the PCR market over the next few
years. In the long run, Panoramic Equiptindo may need to outsource its manufacturing activities and form joint ventures with PCRs manufacturers. Following this option, the company would need to reposition itself as a market -oriented organisation rather than a manufacturing organisation.
Required :
Discuss the key financial reporting issues in relation to the two option regarding the impairment of production facilities.
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