Asset Impairment

FAR loves to feed you three numbers in one problem — carrying amount, undiscounted future cash flows, and fair value — and test whether you apply each in the right step. The tell is the two-step held-and-used model: Step 1 (recoverability) compares carrying amount only to the undiscounted cash flows; if carrying amount does not exceed them, you stop and recognize nothing. Only if it fails do you book Step 2, the loss equal to carrying amount minus fair value. The classic trap is discounting in Step 1 or skipping straight to fair value — discounting belongs in the fair-value (exit-price) measurement, never the trigger test.

Watch the related-term snares. Depreciation is systematic cost allocation, not a triggering event, though it resumes on the new, lower basis. Goodwill uses a one-step quantitative test at the reporting-unit level with no recoverability screen (post-ASU 2017-04, fair value vs carrying amount; the old Step 2 is gone). For held-for-sale assets, switch to lower of carrying amount or fair value less cost to sell, stop depreciating, and remember later recoveries can be recognized — but only up to the carrying amount at the date of reclassification, not original cost.