Financial Statement Modeling Practice Test

When impairment is recognized, you record a non-cash impairment expense in the income statement for the period and simultaneously reduce the asset’s carrying value on the balance sheet to its recoverable amount. Because the asset’s value is written down, equity (via retained earnings) declines, and the depreciation going forward is based on the new, lower carrying amount over the asset’s remaining useful life. This combination—expense in the P&L, a lower asset on the balance sheet, and adjusted (usually lower) future depreciation—captures the full effect of the impairment in the financial model.

The other options miss one or more of these impacts: impairment does not leave the balance sheet unchanged, nor does it raise the asset’s carrying value, nor should it be postponed until the asset is sold.