Question

In testing for recoverability of an operational asset, an impairment loss is required if the:

a. Asset's BV > the undiscounted sum of expected future cash flows.
b. Undiscounted sum of its expected future cash flows > the asset's BV.
c. PV of expected future cash flows > its BV.
d. None of these.

Answer 1

An impairment loss is required if the asset's BV > the undiscounted sum of expected future cash flows.

Step-by-step explanation:

In testing for recoverability of an operational asset, an impairment loss is required if the asset's BV > the undiscounted sum of expected future cash flows.

For example, let's say a company owns a machine with a book value (BV) of $10,000. If the undiscounted sum of its expected future cash flows is only $8,000, then an impairment loss of $2,000 would be required to bring the asset's value down to its recoverable amount.