Final answer:
When changes in circumstances indicate that the book value of an asset is not recoverable, it means that the asset is no longer worth its recorded value on the balance sheet. This can happen due to factors like economic downturns, defaults on loans, or other negative events. Banks and financial institutions regularly reassess the value of their assets to prevent bankruptcy.
Step-by-step explanation:
When changes in circumstances indicate that the book value of an asset is not recoverable, it means that the asset is no longer worth its recorded value on the balance sheet. This usually happens when the asset's fair market value has declined due to factors like economic downturns, defaults on loans, or other negative events.
For example, during a recession, banks may experience a wave of unexpected defaults, causing a decline in the value of their loans. If the loans' value decreases to a point where the bank's assets become worth less than its liabilities, the bank will have negative net worth.
This situation can lead to bankruptcy, as a bank with negative net worth is unable to cover its obligations. To prevent this, banks and financial institutions regularly reassess the value of their assets to ensure they are accurately recording their worth.