- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 7. Analysis of Long-Term Assets
- Subject 2. Impairment of Assets
CFA Practice Question
Which of the following is evidence that a loss due to value impairment must be recognized?
II. There are adverse changes in the legal or business climate.
III. There are significant cost overruns.
I. There is a forecast of a significant decline in the profitability of an asset.
II. There are adverse changes in the legal or business climate.
III. There are significant cost overruns.
Correct Answer: I, II and III
All these conditions are evidence of a decrease in the value of the asset and indicate that the carrying amount of the asset cannot be recovered and a loss on impairment should be recognized.
User Contributed Comments 9
| User | Comment |
|---|---|
| cong | What are cost overruns? |
| reganbaha | It happens when costs over-run |
| swisha | ^^haha, very insightful. Thanks. |
| johntan1979 | Actually I don't understand how cost overruns can or should impair an asset. Is it because during cost overruns, you typically overuse the asset (beyond ordinary usage)? |
| robertucla | I'm not finding cost over runs in CFA text. Anybody? |
| vrutikap | You overrun costs when you exceed your budget |
| jrojasut09 | costs have an effect on the undiscounted cash flows. if a company costs go over budget and carrying value>cash flows, then an impairment must be recognized |
| UcheSam | Cost overrun in terms of spending more on maintenance for continuous use of the asset. This reduces the expected future flow of revenue. |
| alexa821 | i dont like the word "must" in this question..seems too strong to me |