CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Which of the following is compared with a long-lived asset's carrying value to determine whether a potential impairment exists (U.S. GAAP)?

A. The asset's estimated future discounted net cash flows
B. The asset's estimated future undiscounted net cash flows
C. The asset's fair market value
Correct Answer: B

After this amount is estimated, the manager compares it with the carrying amount of the asset. If the carrying amount is greater than the cash flows, the impaired asset is written down. The write-down is the difference between the asset's fair value and its carrying amount.

User Contributed Comments 9

User Comment
kalps good question
xweibabson why undiscounted net cash flow?
morpheus918 Because the carrying amount is depreciated in future periods. The future depreciation just has to be covered by future cash flows. As long as that will happen, there is no impairment.
todolist carrying value compared to undiscounted CF.
Book value compared to fair value or DCF
4002MK Just to be clear, does carrying amount = book value?
rfvo Yes, Book Value or Carrying Value

and Fair Value or Market Value
Renaud1807 Recoverability test: impaired if carrying value> undiscounted CF
Loss measurement: loss is the excess of carrying value over the assets fair market value (if known). If unknown an estimate of present value of future CF

Thus recovery test: undiscounted CF
Loss amount: discounted CF
daveyd83 Why can't it be compared to FMV?
quanttrader recovery test: carrying value > undiscounted CF?

if yes, then write down carrying value-fair value (if known), otherwise write down carrying value to discounted expected future cash flows.
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