List three common indicators that impairment of PP&E might exist and outline the accounting test used to determine impairment.

• A. Indicators: rising market values; Test: compare carrying amount to fair value; if carrying < fair value, recognize impairment.
• B. Indicators: significant adverse economic changes, obsolescence/physical damage, and cash flow underperformance; Test: compare carrying amount to recoverable amount (higher of fair value less costs to dispose and value in use); if carrying > recoverable, recognize impairment.
• C. Indicators: favorable economic changes; Test: compare recoverable amount to cost; if recoverable > cost, recognize impairment.
• D. Indicators: stable cash flows; Test: compare fair value to depreciated cost; if fair value > cost, recognize impairment.

Answer: (B)

When PP&E might be impaired, you look for indicators that things aren’t recoverable enough to justify the asset’s carrying amount. Common internal and external signs include significant adverse changes in the environment, obsolescence or physical damage, and cash flow underperformance. When such indicators exist, you perform the impairment test by comparing the asset’s carrying amount (net book value) to its recoverable amount. The recoverable amount is the higher of fair value less costs to dispose and value in use. If the carrying amount exceeds the recoverable amount, you recognize an impairment loss to bring the asset down to the recoverable amount.

This aligns with the option that lists those three indicators and correctly describes the impairment test as comparing carrying amount to the recoverable amount (the higher of fair value less costs to dispose and value in use) and recognizing impairment when carrying amount exceeds recoverable amount. The other options either state incorrect indicators (such as rising or favorable conditions or stable cash flows) or describe the test improperly (comparing to fair value alone or using the wrong trigger), which do not reflect how impairment is determined.