Financial Accounting and Reporting-CPA Practice Exam

In IFRS, how is the recoverable amount determined for impairment testing?

1. The lesser of FV minus Cost to sell and total assets

2. Greater of FV minus Cost to sell or PV of future cash flows

3. Fixed percentage of net revenue

4. The average of all cash flows

The correct answer is: Greater of FV minus Cost to sell or PV of future cash flows

The determination of the recoverable amount for impairment testing under IFRS is indeed based on the greater of fair value less costs to sell (FV minus costs to sell) and the present value of future cash flows (PV of future cash flows). This approach ensures that the asset is measured at the higher value that can be potentially realized, either through selling the asset or by utilizing its future economic benefits. Fair value less costs to sell represents the amount that could be obtained from the sale of an asset in an orderly transaction between market participants, minus any direct costs attributable to the disposal of that asset. On the other hand, the present value of future cash flows takes into account the present value of the expected cash inflows that the asset can generate over its useful life. By using the greater of these two measures, IFRS aims to reflect the most realistic investigation of how much an asset is worth or could yield, safeguarding against potential losses in asset valuation. Other options provided do not accurately reflect the criteria set by IFRS for determining the recoverable amount. For example, a fixed percentage of net revenue does not account for specific asset performance or market conditions, and averaging all cash flows disregards the time value of money, potentially leading to less accurate assessments of recover