GASB proposes standard on impairment of assets

by Glenn Cheney

Norwalk, Conn. -- The Governmental Accounting Standards Board has issued an exposure draft of a proposed standard on accounting and reporting for impairment of capital assets. If adopted, the standard will, for the first time, tell state and local governments how to handle the accounting when schools burn down, bridges collapse or terrorists strike.

These aren’t accounting situations that happen every day, and many governments go decades without needing to know how to account for and report the loss of a capital asset that wasn’t intended to produce revenues, as would be the case with profit-making corporations. Essentially, the standard would have governments report the loss of service capacity.

"This standard tries to get at what kind of service the asset was expected to provide and equate that to what the asset is being carried at," said GASB project manager Roberta E. Reese.

Reese said that there is no existing guidance on whether to recognize an impairment, when to record the impairment, how to measure it or how to report it.

Some governments have been reporting impairments, though not necessarily in a manner consistent with the reports of other governments. New York City recorded an unexpected impairment in 2001 after the terrorist attack against the World Trade Center destroyed city assets, including part of the subway system.

Disaster isn’t the only cause of impairment. The GASB standard would include, for example, a public school that is closed due to a drop in local enrollment. It would cover a questionable situation where, for example, a school is closed but re-used as a storage facility.

The standard would also include as impairment a change in the legal environment that causes an asset to become effectively useless, for example, the case of a water treatment plant that cannot meet new regulations.

Impairment, however, would not include damage to an asset that does not destroy it. "We’ve tried to draw a line to separating small damage and big damage," Reese said.

The standard would also apply to impairment caused by technological developments, such as new technologies that make a current computer system obsolete within its expected useful life.

The proposal is a logical follow-up to GASB’s recent Statement 34, Basic Financial Statements -- and Management’s Discussion and Analysis -- for State and Local Governments, which requires governments to report information on public infrastructure assets. Governments cringed at the thought of such extensive valuations, though the burden has not generally been as serious as feared.

The proposal on impairment of assets, on the other hand, requires little or no extra accounting efforts on the part of most governments. Reese said that she does not expect governments to rue its arrival as a new accounting burden.

"I don’t think it’s an onerous requirement," Reese said. "We’re not requiring every government to go out and look at all their assets and make sure there aren’t any impairments. The event that causes an impairment is probably something that has already been talked about in management, something that grabs you by the collar of your shirt."

The exposure draft proposes that impairment be measured using the methods that best reflect the value-in-use for the capital assets. The measurement methods include the restoration cost approach, the service united approach and deflated depreciation replacement cost. These measurements are designed to isolate the historical cost of the capital asset’s service capacity that has been rendered unusable by the impairment.

Disclosures would be required for impairment losses that are not evident from the face of the financial statements, for impaired capital assets that are idle, and for insurance recoveries that are not evident from the face of the financial statements.

The statement could be effective for fiscal years beginning after Dec. 15, 2004. GASB requests comments on the exposure draft by Feb. 28, 2003.