Which of the following best describes impairment testing?

Impairment testing primarily involves the estimation of the recoverable amount of an asset to determine whether it is carrying value on the balance sheet should be adjusted. This process is essential to ensure that assets are not overstated and accurately reflect their potential future cash flows. The recoverable amount is defined as the higher of the asset's fair value less costs of disposal and its value in use.

This correct answer highlights the significance of assessing an asset's recoverable amount, which is a vital part of the impairment process as outlined by accounting standards like IAS 36. Through this estimation, entities can identify whether any impairment loss should be recognized in profit or loss, ensuring that financial statements present a true and fair view.

In contrast, the other options either oversimplify the process or misrepresent its scope. Routine reviews of asset values might occur, but impairment testing is not simply routine; it is a specific evaluation focused on recoverable amounts. Measurement against current fair value only does not encompass the requirement to also consider value in use. Finally, impairment testing is applicable to both financial and non-financial assets, thus dismissing the implications of financial assets alone is misleading.