In impairment testing, the recoverable amount is the greater of which two measures?

• A. Carrying amount and fair value
• B. Net realizable value and value-in-use
• C. Fair value and value-in-use
• D. Fair value less costs of disposal and value-in-use

Answer: (C)

In impairment testing, the amount you compare to the asset’s carrying amount is the recoverable amount, which is the higher of two measures: value in use and fair value less costs of disposal. Value in use is the present value of the future cash flows the asset is expected to generate in its current use, taking into account the time value of money and asset-specific risks. Fair value less costs of disposal represents how much you would receive if you sold the asset in an orderly transaction, minus the costs to dispose of it. You test by comparing the carrying amount to this recoverable amount, and if the carrying amount is higher, the difference is recognized as an impairment loss. The other options don’t reflect the standard approach: net realizable value is used for inventories, and carrying amount alone isn’t a recoverable amount.