How is impairment loss calculated under IAS 36?

Under IAS 36, the calculation of impairment loss is determined by comparing the carrying amount of an asset to its recoverable amount. The recoverable amount is defined as the higher of an asset's fair value less costs of disposal and its value in use. If the carrying amount exceeds the recoverable amount, then an impairment loss is recognized.

The formula for calculating impairment loss is correctly stated as the carrying amount minus the recoverable amount. This method ensures that the asset is not carried on the balance sheet at a value higher than it can actually be recovered through use or sale.

Using this formula reflects the principle of prudence in financial reporting, ensuring that assets are not overvalued in the financial statements which would mislead investors and other stakeholders. By establishing that the asset's carrying amount must be reduced to its recoverable amount, it prevents the overstatement of the asset's value.

The other options do not accurately reflect the definition and calculation method outlined in IAS 36. For instance, the first option incorrectly suggests that impairment loss is calculated based only on the fair value, ignoring the carrying amount's necessary comparison with recoverable amount. The second option reverses the correct relationship between carrying amount and recoverable amount, while the last option introduces terms like