Under IFRS, when does impairment exist?

Impairment under IFRS occurs specifically when the carrying value of an asset exceeds the higher of its fair value less costs to sell or its value in use. This definition is established in IFRS standards, particularly in IAS 36, which addresses impairment of assets.

The rationale behind this measurement is to ensure that an asset is not recorded on the balance sheet at a value greater than what it is expected to generate in cash flows (or sell for). Fair value less costs to sell represents the market value of the asset minus any costs required to sell it, while value in use reflects the present value of future cash flows expected to be derived from the asset. If the carrying amount surpasses either of these two measures, then an impairment loss should be recognized.

The other options do not accurately capture the concept of impairment according to IFRS. For instance, the idea that impairment exists when the carrying value is less than historical cost doesn’t align with the impairment assessment since assets can remain at historical cost unless impaired. Similarly, uncertainty in future cash inflows or unfavorable market conditions alone do not constitute impairment. These factors may indicate potential problems, but they do not meet the specific criteria defined by IFRS for recognizing impairment losses.