Which principle underlies impairment accounting to avoid overstating non-current assets?

• A. Prudence (conservatism)
• B. Consistency
• C. Relevance
• D. Neutrality

Answer: (A)

Prudence, or conservatism, guides impairment accounting because it requires reflecting potential downsides as soon as evidence suggests they exist. When you test for impairment, you compare the asset’s carrying amount with its recoverable amount (the higher of fair value less costs of disposal and value in use). If the recoverable amount is lower, you recognise an impairment loss and reduce the asset’s carrying amount. This conservative approach prevents overstating non-current assets on the balance sheet, ensuring the assets’ value reflects expected future benefits more cautiously.

Consistency, relevance, and neutrality are important accounting qualities, but they don’t specifically drive the process of recognizing impairment losses to avoid overstatement. Consistency is about using the same accounting methods over time; relevance is about providing useful information for decision-making; neutrality is about avoiding bias in reporting. The imperative to avoid overstating assets in the face of impairment indicators is a direct application of prudence.