An impairment loss has the effect of:

• A. Recording a gain in the income statement
• B. Increasing the carrying amount of an asset above its historical cost
• C. Reducing the carrying amount of an asset to its recoverable amount
• D. Transferring the asset to equity at fair value

Answer: (C)

Verified step by step guidance

1. Understand the concept of impairment loss: An impairment loss occurs when the carrying amount of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use.
2. Recognize the accounting treatment: The impairment loss is recorded in the income statement as an expense, reducing the carrying amount of the asset on the balance sheet.
3. Clarify the effect on the asset: The carrying amount of the asset is reduced to its recoverable amount, ensuring that the asset is not overstated in the financial statements.
4. Eliminate incorrect options: Recording a gain in the income statement, increasing the carrying amount above historical cost, or transferring the asset to equity at fair value are not valid effects of an impairment loss.
5. Conclude with the correct answer: The effect of an impairment loss is to reduce the carrying amount of an asset to its recoverable amount, aligning the asset's value with its economic reality.