Capital Asset Impairments

_________________________________ David E. Sundstrom, Auditor-Controller
Each department/agency head is accountable for all capital assets assigned to him/her and shall notify the Auditor-Controller of any potential impairment of these assets as soon as possible.
1.1 Purpose
To establish procedures and guidelines for departments/agencies to use in reporting the possible impairment of capital assets.
1.2 Authority
Governmental Accounting Standards Board Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries (GASB 42), issued in November 2003, which became effective for the County of Orange beginning with Fiscal Year 2005-06.
1.3 Definitions
1.3.1 Capital Assets
The State Controller"s Manual, Accounting Standards and Procedures for Counties, defines capital assets as "tangible assets of significant value that have a utility that extends beyond the current year." Generally, capital assets are broadly classified as land, buildings and improvements, infrastructure, and equipment.
1.3.2 Impaired Capital Asset
A capital asset is considered impaired when its service utility has declined significantly and unexpectedly.
1.3.3 Service Utility
The usable capacity an asset was expected to provide when the capital asset was acquired.
GASB 42 establishes accounting and financial reporting standards for impairment of capital assets, including equipment, land, buildings and improvements, and infrastructure. The following procedures are established to evaluate major events affecting capital assets to determine if the asset is impaired. The value of any capital asset that has been significantly impaired as defined in GASB 42 must be adjusted and reported on the financial statements. Financial statement disclosures are required for impaired capital assets still in use, impaired capital assets that are idle, and for insurance recoveries. GASB 42 emphasizes that the County is only required to assess the possibility that a capital asset is impaired if the circumstances indicating potential impairment are prominent, conspicuous and known to department/agency management and prompted discussion with the Board of Supervisors or reported in the media. The Statement further states that absent such events, the County is not required to perform additional procedures to identify potential capital asset impairments beyond those already performed as part of their normal operations. Exhibit A summarizes the capital asset impairment decision process. Based on the specific guidelines discussed in the above paragraph, departments and agencies are required to complete the Notification of Capital Asset Impairments (Exhibit D) to identify potential impairments and to test whether the impairment has occurred for only those capital assets that have experienced significant events or changes in circumstances other than the normal decline in service utility. The completed form should be sent to both the Auditor-Controller General Ledger Unit and CEO- Risk Management.
2.1 Completing the Notification of Capital Asset Impairment Form (Exhibit D)
2.1.1 Part A: Potential Indicators of Impairments
The first step in identifying potential capital asset impairment, where the service utility of the asset has been significantly impaired, is to determine if any of the following circumstances exist. Examples have been provided for illustrative purposes:
1. Evidence of physical damage
Example - A building damaged by fire or flood requiring restoration efforts to restore service utility.
2. Changes in legal or environmental factor that affect usage
Example - The useful life of underground storage tanks was significantly curtailed by the adoption of more stringent environmental regulations.
3. Technological change or obsolescence
Example - A scanning electron microscope that is rarely used because newer equipment provides better service.
4. Change in the manner or expected duration of use
Example - A building that the County has decided to sell and is not being used.
5. Construction stoppage
Example - A permanent stoppage of building construction following the discovery of an endangered species at the construction site.
2.1.2 Part B: Impairment Tests
The presence of one of the potential indicators does not necessarily indicate that impairment has occurred. Two impairment tests, both of which must be met, should be applied once a capital asset has been identified as potentially impaired as described in Section 2.1.1.
Test 1 Is the magnitude of the decline in service utility significant?
The guidance in GASB 42 is intended to apply only to losses in service utility that are likely to be significant to the County. If the cost to restore the asset to continue operation is significant in relation to the service utility of the asset, this impairment test might be met.
Test 2 Is the decline in service utility unexpected or is it part of the normal life cycle of the capital asset?
Management is not expected to foresee with accuracy the useful life of a capital asset or the service utility throughout its useful life. It is only natural that capital assets lose service capacity with age and use. Such foreseeable changes are not evidence of capital asset impairment. Additionally, sometimes the level of demand for a capital asset is significantly less than anticipated. Such reduced demand should not, of itself, be treated as a capital asset impairment.
Is the capital asset still in use? If no, provide the date the asset was taken out of service.
2.1.3 Part C: Temporary Impairments and Capital Assets That Do Not Meet Impairment Test
Generally, capital asset impairment should be considered permanent (e.g. physical damage) and the asset"s value must be adjusted. However, in certain circumstances (e.g., change in the manner or duration of use, technological changes, changes in manner of use, or construction stoppage) evidence may be available to demonstrate that the impairment will be temporary. In such circumstances, no impairment loss would need to be recognized in the financial statements.
1 Is the impairment temporary? If yes, give dates the asset was not in use.
The department must have sufficient evidence to prove the impairment is temporary. For example, construction on an airport runway is stopped because of lack of funding. However, funding from the State is expected to be approved in the future. In this circumstance, there is evidence the impairment is temporary and no impairment loss would be reported.
2 An event or circumstance indicated possible impairment but the Impairment Tests (detailed in Section 2.1.2) were not met.
Has the useful life of the asset changed because of the event or circumstance? If yes, indicate new estimated useful life.
2.1.4 Part D: Insurance Recovery
The impairment loss of a capital asset must be reported on the financial statements net of any associated insurance recoveries.
1 Was any insurance recovery received for the capital asset impairment? If yes, reference the transaction or deposit order number and date.
2.2 Measurement of Capital Asset Impairment
Based on the information provided by departments/agencies on the Notification of Capital Asset Impairments Form, the Auditor-Controller will make any calculations necessary to measure the impairment and adjust the value of the asset to comply with GASB 42 requirements. The following methods are used to measure the impairment loss for capital assets that will continue to be used by the County. See Exhibit B for a summary of the measurement methods.
2.2.1 Restoration Cost Approach
The restoration cost approach is generally used to measure the estimated cost to repair physical damage and restore the asset to its original condition so it can continue to be used by the department.
2.2.2 Service Units Approach
Impairments that are caused by changes in legal requirements, environmental factors, technological changes or obsolescence, or change in the manner or duration of use generally will be measured using the service units approach. This approach determines the amount of the impairment based on the loss of productivity provide by the asset before and after the impairment occurred. The cost of the loss of productivity is the impairment loss reported on the financial statements.
2.2.3 Deflated Depreciated Replacement Cost Approach
This approach is an alternative method that can be used when the impairment is caused by a change in the manner or duration or use of the asset. This method calculates what the depreciated cost of a replacement capital asset would be as a means to determine the relative portion of the historical cost of the impaired capital asset. This estimated current cost of the replacement asset is depreciated to reflect the age of the impaired asset, and then deflated to convert it to historical cost dollars.
2.3 Impaired Capital Assets No Longer in Use
The value of an impaired capital asset that is no longer used by the County will be adjusted by the Auditor-Controller to the lower of carrying value or fair market value.
2.4 Department or Agency Head Certification
Each year after the June 30 records are complete, the Auditor-Controller will send to each department or agency director a certification form (Exhibit C) to sign certifying whether he/she is aware of any capital asset impairments in accordance with this procedure. The certification form will be submitted to the Auditor-Controller General Ledger Unit
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