In auditing impairment of long-lived assets, what are the triggers and how do you calculate impairment loss?

• A. Triggers include adverse changes in market conditions; impairment loss = carrying amount – recoverable amount
• B. Recovery amount equals cost
• C. Impairment is not required for construction
• D. Only depreciation current period

Answer: (C)

Impairment testing starts with spotting indicators that the asset’s recorded value might not be recoverable. These triggers can come from outside the entity, such as adverse changes in market conditions or a drop in market prices, and from inside, like physical damage, obsolescence, or a plan to dispose of the asset. When indicators exist, you determine the recoverable amount, which is the higher of the asset’s fair value less costs to dispose and its value in use. If the carrying amount exceeds this recoverable amount, you recognize an impairment loss equal to the difference.

Notes that help you understand why the other statements aren’t correct: recoverable amount is not simply the cost; impairment tests are not automatically avoided for construction just because an asset is under construction if indicators exist; and impairment is not determined by depreciation alone in the current period. The correct practice centers on identifying triggers and applying the carrying amount minus recoverable amount rule when indicators show recoverability may be an issue.