Financial Accounting and Reporting-CPA Practice Exam 2025 – Your All-in-One Guide to Exam Success!

In the context of IFRS, an impairment loss in goodwill testing occurs when the carrying value of a cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount is defined as the higher of the fair value less costs of disposal and the value in use of the CGU.

When the carrying value surpasses the recoverable amount, it indicates that the asset’s value in financial records is more than what can be recovered through its use or sale, signaling the need for an impairment loss to be recognized. This assessment is performed to ensure that the assets are not overstated on the balance sheet, which is essential for achieving accurate financial reporting.

The correct identification of an impairment loss ensures compliance with the relevant IFRS standards, thereby increasing the reliability of financial statements. This approach sheds light on the importance of regularly assessing the value of goodwill and other intangible assets, especially when there's evidence of potential impairment.

The other choices do not indicate an impairment loss. For example, if the carrying value equaled the recoverable amount, there would be no impairment, as the asset is still considered valuable. Similarly, if the recoverable amount exceeds the carrying value, this signifies that the asset is likely underbooked, rather than impaired.