Question

For the proved reserves, Successful Effort accounting companies are subject to the two-step impairment test on the field-by-field basis when certain “trigger events” are present to recognize and measure an impairment loss. The first step is the Recoverability Test; the second step is the Measurement of Impairment. The Recoverability Test is to compare asset's net carrying value to the Expected Undiscounted Future Cash Flows. An oil company had a proved reserve in Field A. When global oil prices changed significantly, the company was required to conduct the impairment test for Field A. The result of the Recoverability Test in field A was as following: According to the result from the Recoverability Test, there should be NO impairment for Field A based on this test. This statement is True or False? Question 38 options: True False

Answer 1

True.

As given in the question a company should conduct two tests to determine the impairment costs. In step 1, the asset carrying amount first compared with the undiscounted cash-flows it is expected to generate. If the carrying amount is higher than the undiscounted cash-flows then it will continue to step to measure the impairment cost or impairment loss. But if the carrying amount is less than the undiscounted cash-flows then no impairment loss is recognized and step 2 is not necessary.

In the given question, the oil company conducted recoverability test (step 1) for Field A and the result of the test suggested that there should be no impairment loss. Hence there would be no impairment cost for Field A.