ACCA Strategic Business Reporting (SBR) Practice Exam

What is the purpose of estimating fair value during impairment testing?

1. To determine asset appreciation

2. To allow for better resource allocation

3. To ascertain recoverable amount compared to carrying value

4. To prepare tax calculations

The correct answer is: To ascertain recoverable amount compared to carrying value

The purpose of estimating fair value during impairment testing is primarily to ascertain the recoverable amount of an asset in comparison to its carrying value. When performing impairment testing, it is essential to evaluate whether 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. By estimating fair value, an entity can assess if the asset is overstated on the balance sheet and determine the need for any impairment loss that must be recognized in the financial statements. This process ensures that the financial statements provide a true and fair view of the company's financial position, and it aligns with the accounting principle requiring assets not to be carried above their recoverable amounts. Thus, determining the relationship between fair value and carrying value is crucial for compliance with accounting standards and maintaining accurate financial reporting.