If impairment occurs, what is the effect on the asset and the income statement?

• A. Carrying amount is reduced to recoverable amount; impairment loss recognised in profit or loss
• B. Carrying amount is increased to recoverable amount
• C. There is no impact on the financial statements
• D. Only notes are updated without effect on profit or loss

Answer: (A)

When an asset is impaired, you reduce its carrying amount to its recoverable amount and recognize an impairment loss in the income statement. The recoverable amount is the higher of the asset’s fair value less costs of disposal and its value in use. This means the asset’s value on the balance sheet drops to reflect what it can realistically deliver, and the loss appears in the profit or loss for the period, lowering profit. From then on, depreciation is calculated using the new, lower carrying amount. The other options would imply increasing the asset’s value, having no effect on statements, or updating only notes, which does not align with how impairment is recognized in financial reporting.