What does the term "impairment" mean concerning assets under GAAP?

What does the term "impairment" mean concerning assets under GAAP?

• A. An increase in carrying amount
• B. An asset's carrying amount exceeds its recoverable amount
• C. A temporary reduction in value
• D. Assets that have appreciated in value

Answer: (B)

The term "impairment" in the context of assets under GAAP refers to a situation where an asset's carrying amount exceeds its recoverable amount. This situation indicates that the asset's value is impaired, meaning that it is no longer expected to generate economic benefits that justify its current carrying amount on the balance sheet. When an impairment is recognized, the carrying amount of the asset is written down to its recoverable amount, which is the higher of fair value less costs to sell and value in use. This definition is crucial for ensuring that financial statements accurately reflect the true value of assets, allowing stakeholders to make informed decisions based on the expected future economic benefits of those assets. Recognizing impairment helps provide a fair representation of the company's financial position and complies with the principle of conservatism in accounting, which aims to avoid overstating asset values.

The term "impairment" in the context of assets under GAAP refers to a situation where an asset's carrying amount exceeds its recoverable amount. This situation indicates that the asset's value is impaired, meaning that it is no longer expected to generate economic benefits that justify its current carrying amount on the balance sheet. When an impairment is recognized, the carrying amount of the asset is written down to its recoverable amount, which is the higher of fair value less costs to sell and value in use.

This definition is crucial for ensuring that financial statements accurately reflect the true value of assets, allowing stakeholders to make informed decisions based on the expected future economic benefits of those assets. Recognizing impairment helps provide a fair representation of the company's financial position and complies with the principle of conservatism in accounting, which aims to avoid overstating asset values.