Goodwill impairment testing under the recoverable amount approach involves comparing carrying amount to:

• A. Replacement cost of the asset.
• B. Net cash flows of the business unit to the original purchase price.
• C. Current market price of the goodwill.
• D. The higher of fair value less costs of disposal and value in use.

Answer: (D)

The concept being tested is how impairment is measured for goodwill. Under the recoverable amount approach, you compare the carrying amount of the asset (or the cash-generating unit to which the goodwill belongs) with its recoverable amount, which is defined as the higher of its value in use and its fair value less costs of disposal. If the carrying amount exceeds this recoverable amount, an impairment loss is recognized.

So, the comparison is to the higher of value in use and fair value less costs of disposal, which is why that option is correct. Replacement cost, net cash flows relative to the original purchase price, or a current market price for goodwill are not the basis for the impairment test. Goodwill impairment relies on VIU and FVLCD as the recoverable amount.