What is the criterion for determining impairment under US GAAP?

• A. Future cash flows must exceed the carrying value
• B. Total undiscounted cash flows must be less than the carrying value
• C. Carrying value must equal fair value
• D. Market value must be higher than historical cost

Answer: (B)

Under US GAAP, impairment is evaluated using the criterion of total undiscounted cash flows. This means that if the total undiscounted future cash flows expected to be generated by an asset are less than its carrying value, impairment is indicated. This approach aligns with the impairment testing framework, where the carrying value of the asset is compared to the undiscounted cash flows to assess whether the asset may be impaired.

If the cash flows are determined to be less than the carrying value, it indicates that the asset's value on the books is not recoverable based on the cash flows it can produce in the future. Following this assessment, if impairment is determined, the asset's carrying value must be adjusted down to its fair value, which will be the new basis for reporting.

The other options are not suitable criteria for determining impairment under US GAAP. For example, stating that future cash flows must exceed the carrying value overlooks the specific threshold of comparing total undiscounted cash flows. Similarly, the notion that carrying value must equal fair value does not consider the detailed steps required in impairment testing. Lastly, the idea that market value must be higher than historical cost does not apply since impairment assessments focus on recoverability of cash flows, not directly on market versus