Which estimation approach would be most useful in estimating the amount of asset impairment that has occurred due to major flooding?

• A. Replacement cost approach.
• B. Restorative cost approach.
• C. Functional cost approach.
• D. Indicator method.

Answer: (B)

When an asset is impaired by a disaster, you want a number that represents the loss in the asset’s ability to deliver services. The restorative cost approach does exactly that: it estimates the cost to restore the asset to its pre-disaster condition, which directly corresponds to the impairment amount. This gives a monetary figure that reflects the reduction in value due to the flooding, aligning with how impairment is measured.

The replacement cost approach would tell you how much it would cost to buy a new asset, which isn’t the same as the cost to bring the damaged asset back to its original state and service level. The functional cost approach centers on achieving a certain level of function rather than restoring the exact pre-disaster condition, and the indicator method relies on qualitative signs rather than a concrete restoration cost. So the restorative cost approach provides the most direct and useful estimate of impairment from flooding.