If recoverable amount is less than carrying value, what action is taken?

If recoverable amount is less than carrying value, what action is taken?

• A. Impairment loss is recognised and carrying value is reduced to recoverable amount
• B. Asset is immediately disposed of
• C. Useful life is extended
• D. No impairment is recognised but disclosure is required

Answer: (A)

When an asset’s carrying amount is higher than what it can recover, the asset must be written down to its recoverable amount. This is an impairment. The recoverable amount is the higher of the value in use (the present value of future cash flows from the asset) and the fair value less costs of disposal. The impairment loss is recognised in profit or loss, and the asset’s carrying amount is reduced to recoverable amount. After this write-down, depreciation is recalculated based on the new carrying amount and the remaining useful life. The other options don’t address the need to cut the carrying amount to match the recoverable amount: simply disposing of the asset, extending its useful life, or only disclosing without writing down would not satisfy the impairment rule.

When an asset’s carrying amount is higher than what it can recover, the asset must be written down to its recoverable amount. This is an impairment. The recoverable amount is the higher of the value in use (the present value of future cash flows from the asset) and the fair value less costs of disposal. The impairment loss is recognised in profit or loss, and the asset’s carrying amount is reduced to recoverable amount. After this write-down, depreciation is recalculated based on the new carrying amount and the remaining useful life. The other options don’t address the need to cut the carrying amount to match the recoverable amount: simply disposing of the asset, extending its useful life, or only disclosing without writing down would not satisfy the impairment rule.