Which statement about impairment testing is accurate?

Which statement about impairment testing is accurate?

• A. Impairment reduces carrying value to fair value, possibly recognizing impairment loss.
• B. Impairment increases carrying value to fair value.
• C. Impairment has no effect on financial statements.
• D. Impairment affects only goodwill.

Answer: (A)

Impairment testing starts by comparing what an asset is worth on the books (carrying amount) with the amount the asset can generate through use or sale (recoverable amount). If carrying amount is higher, you reduce the asset’s book value to the recoverable amount and recognize an impairment loss in the income statement. The recoverable amount is the higher of fair value less costs of disposal and value in use, so the write-down brings the carrying amount down to that level. This aligns with the idea that impairment lowers value toward a realistic recoverable amount, and it creates an impairment loss. Impairment does not increase carrying value, it does affect financial statements, and it can involve more than just goodwill.

Impairment testing starts by comparing what an asset is worth on the books (carrying amount) with the amount the asset can generate through use or sale (recoverable amount). If carrying amount is higher, you reduce the asset’s book value to the recoverable amount and recognize an impairment loss in the income statement. The recoverable amount is the higher of fair value less costs of disposal and value in use, so the write-down brings the carrying amount down to that level. This aligns with the idea that impairment lowers value toward a realistic recoverable amount, and it creates an impairment loss. Impairment does not increase carrying value, it does affect financial statements, and it can involve more than just goodwill.