Impairment testing in collateral valuation is triggered by which condition?

• A. When collateral value increases.
• B. When market conditions improve.
• C. When collateral value declines or market conditions deteriorate.
• D. Only when the borrower defaults.

Answer: (C)

Impairment testing for collateral valuation is triggered by indicators that the recoverable amount of the collateral has fallen below its carrying value. The key trigger is a decline in collateral value or a deterioration in market conditions that reduces how much can be recovered. When value drops, you reassess and may recognize an impairment loss to reflect the lower recoverable amount. Increases in value or improved market conditions do not prompt impairment testing. Default by the borrower can lead to losses, but impairment testing for collateral valuation is driven by declines in value, not by default alone.