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CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets

A company reports under US GAAP and holds a long-lived asset to be held and used. The carrying amount is 500,000, the sum of undiscounted expected future cash flows is 540,000, and fair value is 430,000. The impairment loss most likely recognized is closest to:

No impairment loss is recognized. Under US GAAP the first step compares carrying amount with undiscounted cash flows. Since 540,000 exceeds 500,000, the asset is recoverable, and the lower fair value of 430,000 is never used to measure a loss.

  1. A0Correct
  2. B70,000
  3. CNot applicable because the loss equals 540,000 minus 430,000, or 110,000

Explanation

Under US GAAP the asset is first tested for recoverability: undiscounted cash flows of 540,000 exceed the carrying amount of 500,000, so the asset passes and no loss is recognized even though fair value is lower. The 70,000 figure applies the fair value comparison, which is only reached if the first test fails.

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