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In the recoverability test for impairment of tangible/definite-life intangible assets, why is it that the estimated...

In the recoverability test for impairment of tangible/definite-life intangible assets, why is it that the estimated future cash flows are compared to the carrying value of the asset as opposed to the fair value of the asset? Is it because assets are generally reported at carrying value costs as opposed to fair value costs?

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Answer #1

Yes, because a tangible asset is reported at its carrying value, the estimated undiscounted future cashflows from the asset are compared with its carrying value to determine whether there is any indication of impairment or not.

The estimated undiscounted future cashflows from an asset are not compared with its fair value because it is assumed that the asset is still going to be used in the business and the carrying value of the asset on the given date will be allocated over its remaining estimated useful life. So if there is an indication of impairment (carrying value being greater than the estimated undiscounted future cashflows), the carrying value of the asset should be reduced by the amount of impairment loss and the reduced carrying value should be allocated over the remaining useful life of the asset.      

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