VALUING PROPERTY- IMPAIRMENT OF CAPITAL ASSETS AND RELATED INSURANCE RECOVERIES - 8618.3

(Renumbered: 10/2020)

(Revised and renumbered from 8619)

Defining Impairment

A capital asset/property is considered impaired when its service utility has declined significantly and unexpectedly. The service utility of a capital asset/property is the expected usable capacity at acquisition. A capital asset/property may be impaired due to events or changes in circumstances, such as:

• Physical damage
• Obsolescence or changes in technology
• Enactment or approval of laws or regulations or other changes in environmental factors
• Change in manner or duration of use
• Construction stoppage

Evaluating Impairment

A capital asset/property generally should be considered impaired if both:

1. The decline in service utility of the capital asset is large in magnitude.
2. The event or change in circumstance is outside the normal life cycle of the capital asset/property.

Agencies/departments are required to evaluate prominent events or changes in circumstances affecting capital assets/property to determine whether impairment of a capital asset/property has occurred. A prominent event would be conspicuous or known to the agency/department. It would be an event or circumstance that has prompted discussion by the governing board, management, or the media. Absent of any such event or circumstance, agencies/departments are not required to perform additional procedures to identify potential impairment of capital assets/property beyond those already performed as part of their normal operations.

If a prominent event or change in circumstance has occurred and there is a potential impairment of capital assets/property, please contact the State Controller’s Office, GAAP Reporting Section (SCO), for additional instructions. The SCO will help agencies/departments identify whether impairment has occurred, measure the impairment loss, and account for the impairment loss and any insurance recoveries.

Measuring Impairment

Impaired capital assets/property that will no longer be used by an agency/department should be reported at the lower of net book value or fair value (i.e., additional depreciation expense and accumulated depreciation would be recorded in the year of the impairment to bring the net book value down to the lower fair value of the asset’s current condition).

Impairment losses on capital assets/property that will continue to be used by the agency/department should be measured using one of three methods prescribed by the Governmental Accounting Standards Board Statement 42 that best reflects the diminished service utility of the capital asset/property. The prescribed methods are:

1. The restoration cost approach.
2. The service units approach.
3. The deflated depreciated replacement cost approach.

Impairment losses are generally reported as a direct expenditure to the program that uses the impaired capital assets.

Recording Insurance Recoveries

Insurance recoveries related to impaired assets are reported net of the related loss when the recovery is realized or realizable in the same fiscal year as the loss.