Accounting Online Program Certification Practice Test

As per IAS guidelines, which element must be assessed when considering impairment?

1. Historical cost

2. Fair value

3. Accumulated depreciation

4. Estimated future cash flows

The correct answer is: Fair value

When considering impairment in accordance with International Accounting Standards (IAS), the fair value of an asset is a crucial element that must be assessed. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount, which is defined as the higher of an asset’s fair value less costs to sell and its value in use. By evaluating fair value, entities can determine whether the book value of an asset is still justifiable or if it needs to be adjusted downwards to reflect current market conditions accurately. In this context, fair value provides a benchmark for assessing whether the asset is overvalued on the financial statements, given potential changes in the market environment. This assessment is fundamental because it ensures that the financial statements present a true and fair view of the assets' worth, which is essential for financial reporting and transparency to stakeholders. Considering the other options, while historical cost and accumulated depreciation relate to the accounting treatment of asset values, they do not directly inform impairment assessments. Historical cost represents the initial acquisition cost, and accumulated depreciation simply reflects the reduction in value over time due to usage, but neither addresses current market value. Estimated future cash flows pertain to value in use calculations but are not a standalone element required for impairment assessments as outlined in IAS