The test of impairment loss if any is governed by the IAS 36 Impairment of Assets.

The standard madates that an asset that is indicated for impairment may be tested by comparing its recoverable amount to that of its carrying amount.

Therefore the options 2 and 4 are ruled out.

Now, let us look at the definition of these terms used as in the standard (please note that I have quoted the definitions verbatim)

 

 

Recoverable Amount - "is the higher of an asset's fair value less costs of disposal and its value in use".

Fair value means the price that we would be able to sell the concerned asset in the open market

Cost of disposal means the cost incurred to dispose/sell the asset such as dismantling costs, selling commission etc.

Value in use - "the present value of the future cash flows expected to be derived from an asset or cash-generating unit"

 

 

Carrying amount - "the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses".

 

 

Therefore from a reading of the above it is clear that recoverable amount is determined by comparing the fair value to the value in use i.e. the higher of these two is recoverable amount.

Hence option 1 is also ruled out and option 3 is the correct answer.

 

 

Result -

If the carrying amount is greater than the recoverable amount as determined above then the asset is impaired and impairment loss is to be recognized.

If the carrying amount is less than the recoverable amount then the asset is not impaired and no further action is required.