What does the term 'impairment' refer to in financial reporting?

What does the term 'impairment' refer to in financial reporting?

• A. An increase in an asset's value
• B. A reduction in the recoverable amount of an asset
• C. The process of re-evaluating asset depreciation
• D. A method for capitalizing costs

Answer: (B)

Impairment in financial reporting specifically refers to a situation where the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. When an asset's carrying amount is determined to be greater than the recoverable amount, an impairment loss is recognized, leading to a reduction in the asset's value on the balance sheet. This aligns with the need for financial statements to present a true and fair view of the entity's financial position, ensuring assets are not overvalued. The other options address different concepts; for instance, an increase in an asset's value does not relate to impairment, and neither does the re-evaluation of asset depreciation or capitalizing costs, as these pertain to different aspects of asset management and accounting principles.

Impairment in financial reporting specifically refers to a situation where the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. When an asset's carrying amount is determined to be greater than the recoverable amount, an impairment loss is recognized, leading to a reduction in the asset's value on the balance sheet. This aligns with the need for financial statements to present a true and fair view of the entity's financial position, ensuring assets are not overvalued.

The other options address different concepts; for instance, an increase in an asset's value does not relate to impairment, and neither does the re-evaluation of asset depreciation or capitalizing costs, as these pertain to different aspects of asset management and accounting principles.