What is the impairment test for recoverability under U.S. GAAP?

Under U.S. GAAP, the impairment test for recoverability focuses on the future cash flows generated by an asset compared to its carrying amount on the balance sheet. The correct answer is based on the principle that an asset is considered impaired if the sum of the expected undiscounted future cash flows is less than the carrying amount.

When future cash flows do not exceed the carrying amount, it indicates that the asset may not be recoverable, which prompts further testing for impairment. This is critical for ensuring that assets are not overstated on the financial statements, and it aligns with the fundamental accounting principle of conservatism, where potential losses are recognized when they occur.

In contrast, the other options do not address the criteria set by U.S. GAAP for determining asset impairment. Future cash flows exceeding the carrying amount would suggest that the asset is recoverable and therefore not impaired. Investor sentiment or fluctuations in replacement costs are not factors in the standard accounting impairment tests, as they do not assess the asset's ability to generate cash flows directly related to its carrying value.