CSOP 22.0 Accounting for the Impairment of Capital Assets

SUBJECT:

Accounting for the Impairment of Capital Assets

SOURCE:

Capital Asset Management

ORIGINAL DATE

OF ISSUE:

August 2010

DATE OF

LAST REVISION:

August 2010

CSOP NO:

22.0

RATIONALE:

To provide reporting and accounting guidelines for the impairment of capital assets.

CSOP:

Impairment of Capital Assets

Indicators of Impairment

Impairment Test

Measurement of Impairment

Insurance Recoveries

 

Impairment of Capital Assets
GASB Statement No. 42 requires Indiana University to evaluate events or changes in circumstances affecting capital assets to determine whether impairment has occurred. Impairment is a significant, unexpected decline in the service utility of a capital asset. The event or change in circumstances that lead to the impairment are not normal and ordinary and would not have been expected to occur during the life of the capital asset..

 

Indicators of Impairment
Impairment is indicated when events or changes in circumstances suggest that the service utility of the capital asset may have significantly and unexpectedly declined. Indiana University has defined significant in this context as one million dollars or more. This threshold includes the total cost to renovate, rebuild or replace the impaired asset. Indicators of impairment include:

 

Evidence of physical damage when the level of damage is such that restoration efforts are needed to restore the service utility. Examples could include:

  • Building with contamination such as mold or asbestos
  • Building with structural damage
  • Building with fire or flood damage
  • Machinery with fire, water or electrical damage
  • Art or Museum object with fire or water damage
  • Vandalism to a building or piece of machinery
  • Vandalism to an Art or Museum object
Enactment or approval of laws, regulations or other changes in environment factors. Examples could include:
  • New water quality standards that a water treatment plant does not meet
  • Underground storage tanks for fuel, water or sewer
  • Smoke emissions
Technological development or evidence of obsolescence. Examples could include:
  • Equipment that is rarely used because newer equipment is more accurate
  • Underutilized mainframe computer
  • Underutilized magnetic resonance imaging (MRI) machine
  • Underutilized electric distribution systems
A change in the manner or expected duration of usage of a capital asset. Examples could include:
  • Closure of a lab prior to the end of its useful life
  • Use of a building changed from academics to storage
Construction stoppage. Examples could include:
  • Stoppage of construction of a building due to lack of funding
  • Stoppage of construction of a building due to a lawsuit

The University Capital Asset Office has made available an Impairment of Capital Asset Acknowledgement Form

If any one of the above indicators of impairment has occurred and the total cost to renovate, rebuild or replace the impaired asset is estimated to be $1M or greater, the acknowledgement form should be completed and forwarded to the University Capital Asset Office.

Please note the above indicators of impairment could also be subject to accounting treatment according to GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations. This could include a building with mold or asbestos contamination or the enactment of laws, regulations or other changes in environmental factors.  See CSOP 34.0 Pollution Remediation Obligation.

 

Impairment Test
A capital asset identified with an indicator of impairment, as described above, should be tested for impairment by determining whether both of the following factors are present. If both are not present, an impairment has not occurred.
  1. The decline in service utility is significant. The expenses associated with continued operations and maintenance or costs associated with restoration of the capital asset are significant in relationship to the current service utility.
  2. The decline in service utility is unexpected. The restoration cost or other impairment circumstance is not a part of the normal life cycle of the capital asset. Management does not expect the asset to fulfill its useful life.
Measurement of Impairment
If both impairment tests have been met as described above and the capital asset will continue to be used by the University, the impairment, or the portion of the historical cost that should be written off, should be measured by the method below, depending upon the impairment indicator that was met. This process will be completed by Financial Management Services. Departments do not need to calculate the amount of the impairment.

  • Impairments resulting from physical damage should be measured using the restoration cost approach. Under this approach, the amount of the impairment is the estimated cost to restore the asset to serviceability. The estimated cost will be converted to historical cost or will be calculated by restating the cost using an appropriate cost index such as the Consumer Price Index. The formula used to determine the estimated cost is:
    (Restoration Cost/Replacement Cost) x Book Value of the Capital Asset
  • Impairments resulting from enactment or approval of laws or regulations or other changes in environmental factors or from technological development or obsolescence generally should be measured using a service units approach. The service units approach separates out the historical cost of the asset that cannot be used due to the impairment event or change in circumstance. The amount of impairment is determined by evaluating the service provided by the capital asset before and after the event or change in circumstances.
  • Impairments identified from a change in manner or duration of use generally should be measured using deflated depreciation replacement cost or using a service units approach. For the deflated depreciation approach, a replacement cost for the asset is estimated. This estimated cost is depreciated to reflect the fact that the capital asset is not new, and then is decreased to convert it to historical cost.
  • Capital assets impaired from construction stoppage should be reported at the lower of carrying value or fair value.
Impaired capital assets that will no longer be used by the government should be reported at the lower of carrying value or fair value.

The University Capital Asset Office will record the impairment to a capital asset follows:

  Account Object Code DR CR
Impairment Loss
95-xxx-xx
4998
$1M
 
Equipment Cost
95-xxx-xx
86xx
 
$1M

Insurance Recoveries
The impairment loss will be reported net of the insurance recovery when the recovery and loss occur in the same fiscal year. Insurance recoveries reported in subsequent fiscal years should be reported as program revenue, non-operating revenue, or extraordinary item.

 

DEFINITIONS:

Impairment of Capital Assets- a significant, unexpected decline in the service utility of a capital asset.

CROSS

REFERENCES:

CSOP 34.0 Pollution Remediation Obligation

GASB Statement No. 42 Accounting and Financial Reporting for Impairment of Capital Assets

RESPONSIBLE

ORGANIZATION:

Organizations that purchase capital assets.