GASB issues new standard on capital asset impairments.

• Author: Gauthier, Stephen
• Position: The Accounting Angle - Governmental Accounting Standards Board

The Governmental Accounting Standards Board just released a new standard on when and how governments should recognize that the service potential of a capital asset has been impaired. The new pronouncement also offers guidance on the appropriate accounting treatment for insurance recoveries, including those not associated with the impairment of capital assets. The provisions of GASB Statement No. 42 will first be mandatory for the fiscal year ended December 31, 2005. Earlier implementation, however, is encouraged.

BACKGROUND

Occasionally, the service potential of a capital asset will be either substantially reduced or eliminated altogether by an intervening event (e.g., natural disaster, accident, obsolescence). Accountants have always recognized immediately in the financial statements the loss that occurs when a capital asset loses all of its remaining service potential. They have not always done so, however, in cases involving only the partial impairment of a capital asset's service potential. GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, will henceforth require the recognition of such impairments.

SCOPE

It is not practical to attempt to reflect in the financial statements every situation in which the service potential of a capital asset has been impaired. Innumerable impairments represent no more than the inevitable result of age and use. Also, the financial effect of a given impairment is often insignificant. To avoid unduly burdening financial statement preparers, the GASB has chosen to limit its requirement to recognize capital asset impairments to just those situations that meet both of the following criteria:

* The event or change that gives rise to the impairment is outside the normal life cycle of the asset (thus eliminating the normal effects of aging and use)

* The magnitude of the decline in service value is significant

INDICATORS OF IMPAIRMENT

GASB Statement No. 42 identifies five specific situations that may indicate that a capital asset impairment meeting the criteria just described might have occurred:

1. Evidence of physical damage. Examples include an office building damaged in a windstorm or a school building requiring mold remediation.

2. Changes in legal or environmental factors. An underground storage tank that is no longer usable as the result of changes in environmental standards is one example of this criterion.

3. Technological changes or...