When impairment occurs, how does it affect the asset and the income statement?

When impairment occurs, how does it affect the asset and the income statement?

• A. Carrying amount is reduced to recoverable amount; impairment loss recognised in profit or loss
• B. Carrying amount is increased to recoverable amount
• C. There is no impact on the income statement
• D. Impairment only affects equity as a revaluation reserve

Answer: (A)

Impairment means the asset’s expected future benefits have fallen below its carrying amount. When this happens, you write the asset down to its recoverable amount—the higher of its fair value less costs of disposal and its value in use—and you record the difference as an impairment loss in the income statement. This reduces both the asset’s book value and profit for the period. For example, if the asset is carried at 100 and its recoverable amount is 70, you recognise a 30 impairment loss and carry the asset at 70. This loss shows up in profit or loss, not just in equity. The other options would either wrongly increase the asset, imply no income statement impact, or limit impairment effects to equity (which isn’t correct in the usual model).

Impairment means the asset’s expected future benefits have fallen below its carrying amount. When this happens, you write the asset down to its recoverable amount—the higher of its fair value less costs of disposal and its value in use—and you record the difference as an impairment loss in the income statement. This reduces both the asset’s book value and profit for the period.

For example, if the asset is carried at 100 and its recoverable amount is 70, you recognise a 30 impairment loss and carry the asset at 70. This loss shows up in profit or loss, not just in equity. The other options would either wrongly increase the asset, imply no income statement impact, or limit impairment effects to equity (which isn’t correct in the usual model).