If carrying amount exceeds recoverable amount, what is required?

• A. Recognize an impairment loss by writing down to recoverable amount
• B. Increase asset value
• C. Record a gain
• D. Do nothing

Answer: (A)

When the amount an asset is recorded for is higher than what you can recover from it, you must recognize an impairment loss and write the asset down to its recoverable amount. The recoverable amount is the greater of the asset’s fair value less costs to dispose and its value in use. The impairment loss equals carrying amount minus recoverable amount and is charged to the income statement, while the asset’s carrying amount on the balance sheet is reduced accordingly. This prevents overstating assets and profits. Increasing the asset value or recording a gain would be inappropriate, and doing nothing would leave the books misstated. Therefore, the correct action is to recognize the impairment and adjust the asset down to the recoverable amount.