[Anonymous]

Hey guys!

This a fairly easy question, but I am just suprised about what the test bank says the correct answer is.

Although a recoverability test[CV > undiscounted CF] has to be performed. You really cannot ultimately recognize an impairment loss if the FV of the asset is greater than the CV Any opinions would be appreciated.

QUESTION:

Which of the following conditions must exist in order for an impairment loss to be recognized?

I.The carrying amount of the long-lived asset is less than its fair value.

II.The carrying amount of the long-lived asset is not recoverable.

A. I only

B.II only

---

Correct Answer.

C. Both I and II

D.Neither I nor II

Explanation:

FASB ASC 360-10-35-17 establishes a recoverability test to determine when an impairment loss is to be recognized. If the undiscounted sum of estimated future cash flows from an asset or asset group is less that the asset’s or asset group’s book value, an impairment loss may need to be recognized. The impairment loss is the difference between the book value of the asset(s) and its (their) fair value. Note that there is not an impairment loss if the fair value exceeds the carrying amount.

[stoleway]

So what's your question?

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[Anonymous]

Was confused by the answer in this question as well when I came across it not too long ago. A better explanation as to why the B is correct and not C:

“The AMOUNT of the loss recognized is the difference between carrying value and fair value, but that difference is not used for TESTING whether an asset is impaired.”

This is the scenario to determine impairment for Assets in Use. I believe once impairment is confirmed, then you would mark down to fair value.

[Anonymous]

Thanks Bobcat

@stoleway My confusion was that since a loss would not be recognized if FV > CV [even after deemed impaired by the recoverability test], then it follows that [CV > FV] must be a condition necessary to recognize an impairment loss.

[mla1169]

If the book value (carrying value) is already less than it's fair value there is no “loss” to recognize. The purpose of recognizing a loss is so you don't mislead users of your financial statements into thinking you have equipment worth x dollars if they couldn't sell that equipment for x dollars. If you're already showing the equipment as less than x dollars nothing is impaired.

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[Anonymous]

Thanks mla- I totally misunderstood the question.

[Author]

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