by Glenn Cheney

NORWALK, CONN. -- The Governmental Accounting Standards Board has plugged a significant, if not especially large, gap in governmental accounting and reporting for impairment of capital assets.

When Statement 42 goes into effect for fiscal years beginning after Dec. 15, 2004, governmental entities will, for the first time, have formal guidance on reporting the effects of impairment and for insurance recoveries on impaired capital assets.

“There hasn’t been any guidance on this in the past,” said GASB project manager Roberta E. Reese. “We have standards that say that when you acquire a capital asset, you should capitalize it and depreciate it over its useful life. Sometimes there are events that take away some of the asset’s service utility, but there hasn’t been any guidance on what governments should do when that happens.”

The statement should clear up inconsistencies in how governments recognize and measure impairment and when they write it down. The new measurement guidelines are based on methods that isolate the cost of the portion of the asset’s service capacity that has been rendered unusable.

The statement defines “impairment” as a significant unexpected decline in the service utility of an asset. “Significant” refers to the relative financial impact of the decline in value of the asset, as in the case of something as serious and unforeseeable as a building damaged by fire — not a flat tire or a computer considered obsolete just a year earlier than expected. A given event might be significant to a small town but not significant to a state government.

“Unexpected,” according to the statement, refers to something that management did not expect when it acquired the asset. Such unexpected events include not just tornadoes and earthquakes, but changes in law or regulation. “Impairment” could also include a building that is discovered to have structural defects.

Other significant unexpected events include unforeseen obsolescence of major information technology systems, changes in the manner or duration of utility, and construction stoppages.

Reese does not expect governments to find implementation to be burdensome or complicated.

“This isn’t something that every government is going to encounter and there is a full range where professional judgment can be applied,” Reese said. “Statement 42 gives some general approaches, but there is still a lot of room for a government to decide what method applies to them and how to apply it to their circumstances. It isn’t all that onerous. We aren’t expecting a government to go through all its capital assets every year and examine them for impairment. Impairment is something that grabs you by the collar of your shirt. You can’t not notice because it’s a big item, something being talked about, a problem that people know they need to address.”

William J. Raftery, controller of the state of Wisconsin, is pleased with the utility and facility of the statement.

“There have been a lot of questions in the past as to how to deal with this,” Raftery said. “In the private sector, it’s been solved, but for governments, it’s been an open question. I don’t see the statement as hard to implement, and I see it as good guidance. It does what it’s supposed to do.”

Raftery saw the statement having minimal impact on large governments with multi-billion-dollar budgets, because unexpected crises would probably need to be valued in the millions of dollars to be considered significant. Smaller governments, however, would be more likely to recognize a building damaged by fire, for example, as a significant event.

While working on impairment, the board decided to include consideration of the treatment of insurance recovery funds for the physical damage that caused impairment. The statement considers the loss event and the insurance recovery as a single financial transaction. Using insurance benefits to replace or repair the asset, however, is considered a second transaction.

The statement includes several new disclosure requirements designed to help the users of financial statements understand the nature and impact of impairment. Disclosures are required for losses and insurance recoveries that are not readily evident on the face of financial reports, and for impaired assets that are idle.

GASB collaborated with the International Federation of Accountants’ Public Sector Committee, which is developing a similar project for an international standard. The federation has issued an exposure draft, with comments requested by Jan. 31, 2004.

“By working with IFAC, we had access to more examples and measurement methods from different countries, some of which do not report capital assets at historical cost, giving them more experience at revaluing an asset at some point in time,” Reese said.

Paul Sutcliffe, technical director of IFAC’s Public Sector Committee, said that the GASB statement and the exposure draft issued by the federation’s international public sector accounting standard are compatible, but by no means identical.

“In broad terms and matters of principle and approach, they are compatible,” Sutcliffe said. “However, GASB adopts a strict historical cost basis of accounting, and [we] allow for more contemporary values.”

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