Are Your Assets Impaired?
by Eugene Park, CPA, Audit Manager
Posted on October 23, 2014
Has the use of government property significantly changed? Have governmental buildings been closed? Has a natural disaster changed the use of government property? Are these items included on the capital assets listing?
These are some of the questions you should consider during the annual update of your government’s capital assets listing. You should also be asking questions about whether these items can be considered for impairment.
What is impairment? Asset impairment is a sizable, unanticipated decline in the usable capacity of a capital asset due to the normal decline in useful life or to impairing events, such as physical damage, obsolescence, approval of laws or regulations or other changes in environmental factors, or change in manner or duration of use.
How should the impairment of assets be assessed? The determination of impairment of a capital asset is a process of (1) identifying potential impairments and (2) testing for impairment. The events or changes in circumstances affecting a capital asset that may indicate impairment should be known to the government.
What are indicators of impairment?
- Physical damage such as a building significantly damaged by fire
- The enactment of laws or regulations or other changes in environmental factors
- Technological development or evidence of obsolescence such as items rarely used because newer items provide better service
- A change in the manner or expected duration or use of a capital asset such as the closure of a building prior to the end of its useful life
- Construction stoppage
How do I test for impairment? A capital asset identified as possibly being impaired should be tested for impairment by determining whether both of the following factors are present:
- The magnitude of the decline in use is significant (i.e., the expenses associated with continued operation and maintenance or costs associated with restoration of the capital assets are significant in relationship to the service and or benefit provided).
- The decline in use is unexpected (i.e., the restoration cost or other impairment circumstance is not a part of the normal cycle of the capital asset).
How do we measure impairment? For impaired capital assets that the government will continue to use, the amount of impairment should be measured by one of three methods listed below. The government should select the method that most appropriately reflects the decline in use of the capital asset.
- Restoration cost approach – The amount of impairment is calculated from the estimated costs to restore the use of the capital asset. Generally, physical damage impairments are measured using this approach.
- Service units approach – The amount of impairment is calculated by evaluating the service provided by the capital asset. Generally, impairments resulting from enactment or approval of laws or regulations or other changes in environmental factors or from technological development or obsolescence are measured using this approach.
- Deflated depreciation replacement cost approach – The current cost for a capital asset to replace the current level of use is estimated. The estimated current cost is depreciated to reflect the fact that the capital asset is not new, and then is deflated to convert it to historical cost dollars. Impairments resulting from a change in manner or duration of use should be measured using this approach.
In addition, capital assets no longer to be used or that are impaired due to the stoppage of construction should be reported at the lower of the carrying value or the fair value.
What if the impairment is temporary? When impairments are deemed to be temporary, then the capital asset(s) should not be written down.
Finally, the carrying amount of impaired capital assets that are idle at year-end should be disclosed, regardless of whether the impairment is considered permanent or temporary.
To ensure accurate disclosure in your organization’s financial statements, be sure to consider the impairment of capital assets, particularly in light of the economy of the past few years. Additional information on the impairment of capital assets can be found in the GASB Statement No. 42.
