ISSUES IN ACCOUNTING EDUCATION
Vol. 25, No. 1
2010
pp. 59–70
American Accounting Association
DOI: 10.2308/iace.2010.25.1.59
Snowy Ridge Ski Resort: Fair Value
Measurement and the Impairment of
Long-Term Assets
Richard A. Gore and Paul J. Herz
ABSTRACT: The Snowy Ridge Ski Resort case study illustrates the use the
new Fair Value Measurement Standard (SFAS No. 157) with various assets
in connection with the acquisition of a ski resort and subsequent test for
impairment. The case study introduces students to the two primary
approaches for measuring fair value (Market and Income). These approaches
are then used to compute fair value for a variety of assets. In addition,
students become familiar with the Fair Value Hierarchy and classify fair value
measures in accordance with the hierarchy. The assets to which the fair value
measures are generated include: marketable securities; property, plant, and
equipment; real estate under development; and goodwill. The fair values and
other input data are then used to test for impairment of the operating assets
and goodwill. Thus, the case study illustrates the interplay between fair value
measurement and impairment testing in a simple setting to give the student a
foundation for understanding how fair value measurement is used in GAAP
for operating assets.
INTRODUCTION
Kate Smith, chief accountant for Recreational Properties, Inc., couldn’t help but admire the view
of the mountains as she sipped her coffee before getting down to work. It was July 20X2 and Kate
was visiting the offices of Snowy Ridge Ski Resort, one of the subsidiariesof Recreational
Properties. Her task for the day was to finalize the asset values to be reported on the year-end
financial statements for the Snowy Ridge Ski Area. While Snowy Ridge seemed like a promising
acquisition two years ago, below average snowfall and the current downturn in the real estate
market had seriously impacted the initial projections for success. Accordingly, Kate’s assignment
was to evaluate the assets for possible impairment.
Background
The Snowy Ridge Ski Resort is located in the San Juan Mountains of southwest Colorado.
Annual snowfall near 250 inches attracts local skiers and snowboarders, and a four-star lodge at
the base of the slopes attracts vacationers from Arizona, New Mexico, Texas, and Colorado.
Richard A. Gore is an Associate Professor and Paul J. Herz is a Professor, both at Fort Lewis College.
We appreciate the thoughtful comments of the editor and two anonymous reviewers, and our students who each in their
own way helped us improve the case.
Published Online: February 2010
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Gore and Herz
Recreational Properties, Inc., (RP) is a holding company for a portfolio of recreation-oriented
corporations. These companies operate golf resorts, spas, fishing lodges, and dude ranches. Snowy
Ridge is RP’s first venture into the ski and snowboard industry and is operated as a separate unit
for which discrete financial information is available, and corporate regularly reviews the operating
results of the resort. A lucrative sale of a golf resort provided the money to purchase the ski resort.
The golf resort had been chosen by the PGA to host a nationally televised golf tournament, and
the press and attention resulting from the event had put RP in a position to realize a profit well
beyond its original investment. At the time, the Snowy Ridge acquisition seemed like the perfect
oppor-tunity. Unfortunately, the weather and the economy did not cooperate.
Purchase Information
RP acquired Snowy Ridge two years ago on June 30, 20X0, for $ 46.5 million in a cash
purchase. The fair value of identifiable assets and liabilities acquired are reported in Exhibit 1.
These assets included the ski lifts and other infrastructure on the slopes, a four-star lodge at the
base of the slopes, and real estate surrounding the base area. One attractive aspect of the acquisition was the undeveloped land surrounding the ski area that could be converted into residential
lots for sale. The real estate market at that time suggested that this development could be very
lucrative.
As with most ski and snowboard areas in the western United States, the purchase included
Special Use Permits, granting Snowy Ridge the right to use federal land as the site for its ski lifts,
trails, and related activities. Snowy Ridge pays a fee to the Forest Service equal to 2 percent of its
sales occurring on Forest Service land for the Special Use Permit. The Forest Service can terminate Snowy Ridge’s permit if the Service determines that termination is in the public interest.
However, no Special Use Permit in connection with a ski resort has ever been terminated against
the wishes of the permit holder.
Snowy Ridge Operations
Kate has concluded that the Snowy Ridge Ski Resort is considered a single reporting unit of
RP because it is accounted for and operated separately from RP’s other properties. However, the
operations of the Snowy Ridge Ski Resort are separated into three divisions: Mountain, Lodging,
and Real Estate. Each division represents a separate business such that the cash flows of each
division are largely independent of the other divisions.
The Mountain division derives revenue from the sale of lift tickets and other services such as
ski and snowboard lessons, equipment rentals, and other recreational activities. Ski resort operations are highly seasonal in nature, with the typical ski season beginning in mid-November and
running through mid-April. In an effort to counterbalance the concentration of revenues in the
winter months, Snowy Ridge offers non-ski season attractions such as guided hiking, sightseeing,
and mountain biking in the summer and fall.
The Lodge division generates revenue from renting rooms to skiers and other vacationers.
The intent of the Lodge is to complement and enhance the ski resort. The Lodge consists of 85
rooms and is categorized by Smith Travel Research, a leading lodging industry research firm, as
luxury accommodations. During the fiscal year, the Lodge generated average daily rates of $160.
How-ever, due to the poor snowfall of the previous two years, Snowy Ridge experienced a lower
average occupancy versus the general lodging industry. For the year ended June 30, 20X2,
average occupancy was 61 percent.
The Real Estate division is engaged in development of the land adjacent to the ski area into an
Alpine Village of private homes. Currently the property is zoned for 145 home sites. The
company plans to sell the home sites to individuals and custom builders. Infrastructure costs for
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Snowy Ridge Ski Resort
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streets, water, and sewer since the acquisition have added $2.4 million to the costs of the lots.
Sales of home site lots commenced in the last quarter of the most recent fiscal year, and were
mildly disappointing. During the quarter the company sold five lots.
There are significant barriers to entry for new ski areas, due to the limited private lands on
which ski areas can be built and the difficulty in getting governmental approvals to build on public
lands, as well as the significant capital needed to construct the necessary infrastructure. Nonetheless, the ski industry is highly competitive. A ski area’s profit and growth potential is largely
dependent on attracting skiers away from other resorts. There are a variety of factors that contribute to a skier’s choice of ski resort, including terrain, weather, especially snowfall, and the availability and type of lodging. Due to the lack of snow and the real estate slowdown, Snowy Ridge
has lost money in each of the last two years. The financial results for the most recent year are
reported in Exhibit 2. Snowy Ridge’s balance sheet at year-end, June 30, 20X2, prior to fair value
adjustments, is reported in Exhibit 3.
Impairment Issue
At the end of the current year, Snowy Ridge’s balance sheet is very similar to what it was
when it was acquired by RP. For example, Snowy Ridge has continued the practice of selling
deeply discounted season passes at the end of each ski season. The proceeds from the after-ski
season sale are invested in debt securities until needed to fund autumn and pre-winter ski season
costs. Hence, at year-end, investment in marketable securities remains a significant asset. The
other assets remain basically the same, with account balances adjusted for subsequent activity and
depreciation charges where appropriate.
At the time of the acquisition, RP believed that it could enhance the profitability of Snowy
Ridge through the development of the Alpine Village, expansion and improvements of the ski
slopes, improvements in the operating efficiency of the operations, and cross-marketing efforts to
increase its existing customer base. However, in light of the recent losses and the economic
slowdown, management believes it is appropriate to undertake a comprehensive review of the
Snowy Ridge Ski Area to determine if any assets should be impaired as of June 30, 20X2. In
connection with this review, Kate reviewed the following data regarding the significant assets of
Snowy Ridge at June 30, 20X2.
Fair Value Information at June 30, 20X2
Kate received a memo from the chief executive officer of Snowy Ridge that the company had
recently acquired a report from a qualified professional valuation specialist that the fair value of the
entire Snowy Ridge Ski area including the real estate and the lodge net of its liabilities is $41 million.
In addition, this fair value estimate has been appropriately classified as a Level 2 measure, per SFAS
No. 157 (FASB 2006). Kate also notes that RP uses a 12 percent discount rate in calculating the present
value of future cash flows of investments for internal analysis of projects. This discount rate is unique
to RP and may be different from the appropriate rate for Snowy Ridge or its operating divisions.
Additional information regarding specific assets is presented below:
Investment in Marketable Securities
The marketable securities held for investment are all publicly traded debt instruments and are
classified as Available-for-Sale per SFAS No. 115 (FASB 1993). Accordingly, Kate verified the
quoted market price for the bonds per the year-end brokerage statement. The market price of the
bonds held by the company on June 30, 20X2, is reported in the following table:
Issues in Accounting Education
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American Accounting Association
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Gore and Herz
Description
US Treasury Bonds
GE Corporate Bonds
JNJ Corporate Bonds
Total
Market Price
$2,550,000
990,000
1,025,000
$4,565,000
Mountain Division
Although there are no assets identical to the ski area of the resort, unlike the Marketable
Securities, Kate notes that two other very similar ski areas (Mountain Divisions only) were sold in
the last year. Kate recognizes that she can use these sales to compute a market multiple to estimate
the value of Snowy Ridge’s Mountain Division. Her research indicates that these and other sales
of ski areas (mountain division only) are often expressed as a multiple of sales revenue. The prior
sales included the following: Sunset Mountain, which generated average annual sales revenue of
$6,500,000, was sold for $11,375,000, and Crooked Creek, which generated average annual sales
revenue of $13,000,000, was sold for $22,750,000. She notes that these sales include both the
special use permit as well as the infrastructure related to the Mountain Division. Further, her
review suggests that there are no unique or distinguishing characteristics at Sunset Mountain or
Crooked Creek that would cause these resorts to generate sales prices significantly different from
Snowy Ridge. The Snowy Ridge Ski Area has generated average annual sales revenue, over good
years and bad, of $5,500,000. Hence, Kate believes this is a reasonable estimate to use in applying
the market multiple derived from the sales of the other ski areas. Furthermore, Kate observes that
although the Mountain Division is currently operating at a loss ($320,000), once depreciation
expense is added back to the Division’s net income, it is operating at breakeven on a cash basis.
Thus, the future undiscounted cash flows from operating the Mountain Division are expected to be
marginal at best. Accordingly, by default Kate plans to use the Division’s current market price as
an estimate of its undiscounted future cash flows.
Lodge Division
Kate notes that for the lodge, she has the necessary information to estimate fair value using
either the income approach or the market approach. Under the income approach, she must
discount some measure of the lodge’s future operating income at the appropriate discount rate.
Her research indicates that the market discount or capitalization rate of similar lodges as of June
30, 20X2, based on the gross profit, is 6 percent. She notes that discount or capitalization rates are
often used for real estate assets because of the relatively stable cash flows these assets generate.
She recognizes that this discount rate has probably changed substantially since the end of
Snowy Ridge’s fiscal year-end as the economic crisis has deepened after the year-end; however,
that is next year’s problem. Her task is to compute fair value as of June 30, the balance sheet date.
In addition, she also notes that this rate is lower than the 12 percent used by RP for its internal
investment analysis.
Kate’s discussion with the management of Snowy Ridge at June 30, 20X2, led her to believe
that the Lodge’s future average occupancy based on average snow conditions should be 70 percent. Using the current average room rate of $160 per night, she prepared the following projection
of future annual operating income for the Lodge division.
Description
Annual Projection
Revenues
Cost of Sales
$3,474,800
2,779,840
Gross Profit
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$694,960
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Snowy Ridge Ski Resort
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Alternatively, under the market approach, Kate notes that the fair value of lodges of this type
is often expressed as a multiple of current year revenue. Her research reveals that the mean
multiple of the five mountain resort lodges sold in the western United States within the last year
were 3.75 times the prior year revenue of the lodge. Again, she notes that subsequent to June 30,
20X2, the market for hotel properties has deteriorated; however, that also is next year’s problem.
Real Estate Division
Management expects the home sites to sell out over the next four years per the following
schedule despite the recent real estate downturn:
Lots
20X3
20X4
20X5
20X6
20
35
40
45
Lot sales are expected to be slightly below initial projections, but are consistent with the five
sales in the last quarter of the current year. Lot sales are expected to recover as the economy
improves in 20X4 and the development matures. Furthermore, Kate notes that although real estate
activity has slowed recently, sale prices are holding steady in the local market. The projected net
selling price for each lot is $180,000. In addition, the company expects to incur $600,000 per year
in overhead expenses. Given the unique nature of the real estate development, Kate does not
believe there are any comparable developments she can use to find a market multiple for the
project. However, given the finite nature of the project, Kate recognizes that she can compute the
present value of the net cash flows the project is expected to generate. Discussion with the real
estate executives for the company and a review of current market conditions suggest that the
market discount rate for developments of this type is 20 percent. The relatively high discount is
driven by the uncertainty regarding real estate developments in 20X3 and beyond.
Liabilities
The liabilities consist of accounts payable and a bank loan. The accounts payable are all
currently due and are recorded in the accounting records at the face value of the debt. Details
regarding the bank loan are noted in the footnotes to the financial statements in Exhibit 3. Kate
has also confirmed that although the company is operating at a loss, it is very capitalized, and
there has been no change in its credit rating.
ASSIGNMENT
1.
2.
3.
1
Define fair value and explain the purpose and function of the Fair Value Hierarchy.
Calculate the initial value of Goodwill resulting from the acquisition of the Snowy Ridge
Ski Resort on June 30, 20X0, by Recreational Properties. Note that Goodwill has not
been adjusted since the purchase.
Determine the fair values of identifiable assets and liabilities that differ from their carrying value of the Snowy Ridge Ski Area as of June 30, 20X2. Also, identify the level per
the Fair Value Hierarchy of each fair value measure. Use the following table to organize
your results.
Gross Profit may be assumed to approximate cash flow in the lodging industry.
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Valuation
Approach
Asset
Level
Calculation
Fair Value
Marketable Securities
Mountain Division
Lodge Division
Lodge Division
Final Lodge Division Value
Real Estate Division
4.
Asset
Multiple lines are left for the lodge because information is provided to calculate its fair
value two different ways. In addition, it is necessary to arrive at a single final fair value
estimate of the Lodge to complete the remainder of the assignment. Include any assumptions you make regarding your estimates below the table.
Test the operating assets, other than Goodwill, for impairment or fair value adjustment as
of June 30, 20X2. (Hint: Impairment tests need to be performed for each of the three
divisions: Mountain, Lodge, and Real Estate.) Kate has prepared the following work
paper to organize her impairment testing.
Carrying
Value
Impairment Table
Undiscounted
Recoverable
Cash Flows
Yes/No
Fair Value
Adjustment
Dr (Cr)
Marketable Securities
Mountain Division
Lodge Division
Real Estate Division
5.
6.
Test Goodwill for impairment as of June 30, 20X2.
Prepare the necessary adjusting entries to record the Snowy Ridge balance sheet as of
June 30, 20X2, in accordance with GAAP. Note that you may ignore deferred income
taxes.
7. Prepare the Snowy Ridge Ski Resort Balance Sheet as of June 30, 20X2, in accordance
with GAAP. For each asset and liability, identify the measurement attribute and its level,
if applicable, per the Fair Value Hierarchy.
8. Write a memo to the RP management regarding your analysis and findings. Place your
work in connection with Questions 3–7 of the case in an appendix to the memo.
9. Identify the significant assumptions you made in the measurement of fair value for each
of the Divisions. Provide one numerical example of how the financial statements would
have been altered if one of the assumptions had been changed.
10. Rank the assets and liabilities reported on the Snowy Ridge’s June 30, 20X2, balance
sheet in terms of the level of confidence you have in their reported value. Discuss how
your ranking compares to the levels in the Fair Value Hierarchy.
11. Assume after the end of the fiscal year ₃June 30, 20X2₃ the real estate markets and the
overall economy continued to worsen such that a credit crisis developed. The result of
this credit crisis was that the availability of loans to purchase real estate or lodging assets
all but disappeared. Consequently, Kate estimates that if RP were forced to sell its assets
in this new environment the selling price would be substantially reduced from the estimates of fair value at June 30, 20X2. Discuss how Kate would estimate fair value for the
lodging and real estate assets in this environment and how the change in economic
circumstances after year-end would impact the Snowy Ridge financial statements.
12. Discuss the advantages and disadvantages of using fair value measurement in the financial statements.
Snowy Ridge Ski Resort
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EXHIBIT 1
Snowy Ridge Ski Resort Fair Value of Identifiable Assets
and Liabilities at Date of Acquisition June 30, 20X0
Description
Fair Value
Cash
Investment in Debt Securities
Real Estate/Land Held for Development
Special Use Permit
Ski Lifts and Infrastructure
Lodge and Related Equipment
Accounts Payable
Net Fair Value
$600,000
4,400,000
15,000,000
5,000,000
8,000,000
10,000,000
Description
₃500,000₃
$42,500,000
EXHIBIT 2
Snowy Ridge Ski Resort Income Statement June 30, 20X2
Mountain
Lodge
Real Estate
Revenues
Cost of Sales/Direct Costs
Gross Profit
Other Expenses
Depreciation Expense
Net Income ₃Loss₃
Issues in Accounting Education
Total
$5,500,000
₃5,100,000₃
$3,028,040
₃2,422,432₃
$800,000
₃600,000₃
$9,328,040
₃8,122,432₃
$400,000
₃400,000₃
₃320,000₃
$605,608
₃400,608₃
₃250,000₃
$200,000
₃125,000₃
₃0₃
$1,205,608
₃925,608₃
₃570,000₃
₃$320,000₃
₃$45,000₃
$75,000
₃$290,000₃
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EXHIBIT 3
Snowy Ridge Ski Resort Balance Sheet June 30, 20X2
Description
Cash
Investment in Marketable Securities
Land held for Development ₃Real Estate Division₃
Special Use Permit ₃Mountain Division₃
Ski Lifts and Infrastructure ₃Mountain Division₃
Lodge ₃Lodge Division₃
Goodwill
Total Assets
Accounts Payable
Bank Loan
Total Liabilities
Capital Investment
Retained Earnings ₃deficit₃
Equity
Total Liabilities and Equity
$540,000
1
4,500,000
2
16,800,000
3
5,000,000
4
7,360,000
5
9,500,000
6
4,000,000
$47,700,000
$150,000
7
1,500,000
$1,650,000
46,500,0008
9
₃450,000₃
$46,050,000
$47,700,000
1. Investment in Marketable Securities is classified as Available for Sale and consists of the following bonds at cost:
Description
Cost
US Treasury Bonds
$2,500,000
GE Corporate Bonds
1,000,000
JNJ Corporate Bonds
1,000,000
Total
$4,500,000
2. The land held for development is comprised of available residential home sites. The balance sheet value represents the
original purchase price of $15,000,000 plus $2,400,000 of improvements minus $600,000 of cost of sales from the most
recent year.
3. The Special Use Permit has an indefinite life and is recorded at its initial acquisition price.
4. The Ski Lifts and related infrastructure are depreciated on a straight-line basis with an average life of 25 years. The
balance sheet value is based on its original acquisition costs of $8,000,000 less Accumulated Depreciation of $640,000.
5. The Lodge and related equipment are depreciated on a straight-line basis with an average life of 30 years. The balance
sheet value is based on its original acquisition price of $10,000,000 ₃allocated 75 percent to buildings and equipment
and 25 percent to land₃ less Accumulated Depreciation of $500,000.
6. The Goodwill has an indefinite life and is recorded at its initial acquisition costs.
7. The Bank loan calls for interest-only payments for three years. The interest rate varies monthly and is set to prime plus
2 percent. The prime rate at the end of the year is 6.5 percent.
8. Capital Investment represents RP’s initial investment in Snowy Ridge. Note that Snowy Ridge is considered a separate
reporting unit, but it is not a separate legal entity.
9. Retained Earnings represent the cumulative losses of the Snowy Ridge Ski Resort reporting unit since the date of its
acquisition by Recreational Properties, Inc.
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