As spring approaches and new projects begin, it is a good time to assess current fixed assets and evaluate them for impairment. According to Governmental Accounting Standards Board (GASB) Statement No. 42, “Governments are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred.” The first question all entities should address is What is an Impairment? Asset impairment is defined by the GASB as a significant, unexpected decline in the service utility of a capital asset. The determination of an impairment is done in a two-step process: (1) identify potential impairments risks, and (2) test for impairment. A variety of factors should be considered in identifying and testing for impairment including, but not limited to, physical damage, changes in laws or regulations, changes in environmental factors, changes in technology or evidence of obsolescence, changes in the manner or duration of use, or construction project stoppage or abandonment.
For example, a City ABC provides utility services including water service. Recently, the Federal government enacted new policies regarding water quality standards. City ABC has determined its current facility is unable to meet new standards and is unable to be retrofitted to do so in the future.
Two factors in determining impairment should be present:
- The magnitude of the decline in service utility is significant.
- The decline in service utility is unexpected.
In consideration of the example –
- Is the magnitude of the decline in service utility significant? Yes. Continued operation and maintenance will result in expenses that are much higher than the benefit being derived from the current facility as it is unable to use the facility to provide water service.
- Was the decline in service utility of the asset unexpected? Yes. It was unforeseen to management at the time of construction of the facility that regulations would change prior to the end of the facility’s useful life.
If your entities fixed asset listing is particularly large, we recommend breaking it up into groups and evaluating each group on a periodic basis instead of all at once. Additional information on accounting for impairments can be found here: https://www.gasb.org/cs/ContentServer?c=Document_C&cid=1176160028905&d=&pagename=GASB%2FDocument_C%2FGASBDocumentPage