According to FASB ASC 350, what is the unit of testing for impairment?

The correct answer is the reporting unit. Under FASB ASC 350, the unit of testing for impairment is defined as the reporting unit, which reflects the lowest level at which an entity's goodwill is monitored for internal management purposes. This is significant because impairment testing must be conducted at a level where management can observe the cash flows generated by the underlying assets associated with goodwill.

This level typically aligns with operating segments or discrete groupings of assets that have a business purpose and contribute to cash flow generation. By utilizing the reporting unit as the testing ground for impairment, entities perform a more accurate and relevant assessment of whether the carrying value of the goodwill exceeds its fair value. This rigorous approach to impairment testing ensures that financial statements reflect the true economic realities of the reporting unit's performance, making it critical for valuation and the overall understanding of a company's worth.

Utilizing an entity level, asset level, or industry sector level for impairment testing would not adequately address the nuances of cash flow generation and operational effectiveness specific to the different components of a business, which is why the reporting unit is the appropriate choice in accordance with FASB ASC 350.