ACCA Strategic Business Reporting (SBR) Practice Exam

What must be estimated if an impairment indicator has arisen?

1. The recoverable amount

2. The historical cost basis

3. The fair value of assets

4. The expected return on equity

The correct answer is: The recoverable amount

When an impairment indicator arises, it is necessary to estimate the recoverable amount of the asset in question. The recoverable amount is defined as the higher of an asset's fair value less costs of disposal and its value in use. This estimation is vital as it determines whether the carrying amount of the asset exceeds its recoverable amount, thereby indicating an impairment loss that needs to be recognized. Estimating the recoverable amount involves assessing both market conditions and the asset's potential future cash flows, making it a critical step in evaluating the asset's value and ensuring that financial statements reflect the true economic condition of the entity. This process can influence a company's financial performance as impairment losses affect profitability and asset values on the balance sheet. Regarding the other options, while historical cost basis and fair value might be relevant in the broader context of asset valuation, they are not necessary to estimate specifically when an impairment indicator arises. The expected return on equity is unrelated to the impairment assessment process.