When is an asset considered to be impaired?

An asset is considered to be impaired when the carrying amount cannot be recovered. This situation arises when the expected future cash flows generated by the asset are less than its carrying value on the balance sheet. In other words, if a company anticipates that the asset will not generate sufficient economic benefits to justify its recorded value, an impairment needs to be recognized.

This recognition of impairment is critical as it ensures that the financial statements reflect a more accurate value of the asset and the overall financial position of the entity. Assessing impairment usually involves comparing the carrying amount of the asset to the asset’s recoverable amount, which is the higher of its fair value less costs to sell and its value in use. If the carrying amount exceeds the recoverable amount, then an impairment loss should be recorded, thereby reducing the asset’s value on the balance sheet.

The other scenarios provided do not reflect the criteria established for impairment. For example, recovering the carrying amount indicates that an asset is working as expected, while disposal of an asset or cessation of its use reflects different aspects of asset management rather than impairment in itself.