A recent examination of a 2003 accounting standard for state and local governments on the impairment of capital assets and insurance recoveries was concluded with mixed reviews, as an independent team noted that the rule does provide pertinent information to financial statement users but does not resolve all issues underlying its purpose.
The accounting standard that was critiqued by a post-implementation review (PIR) team of the Financial Accounting Foundation – Governmental Accounting Standards Board (GASB) Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries – establishes measurement guidance for capital asset impairments and requires governments to report the effects of those impairments when they occur, rather than as a part of the ongoing depreciation expense for the capital asset or upon disposal of the capital asset.
The GASB rule, which was issued in November 2003, also provides uniform reporting guidance for insurance recoveries of state and local governments.
The review team received broad-based input from GASB stakeholders, including auditors and preparers, and more limited input from financial statement users and academics.
Based on the team’s research, the PIR report found that users had mixed views as to whether Statement 42 achieved the two objectives for capital asset impairments: establishing recognition criteria for impairments and requirements that appropriately measure the effects of impairments.
Some users believed that an alternative measurement approach – such as estimated replacement/restoration cost, fair value, or recovery of cash flows approach – should be used in some circumstances.
“The GASB recognizes that there are differing views related to the issue of alternative measurement approaches and believes that the issue was carefully considered during the development of Statement 42,” GASB Chairman David Vaudt wrote in the standard-setting board’s response to the PIR report. “Some of these alternative views highlighted in the PIR report are consistent with those expressed during the due process procedures conducted during the development of Standard 42.”
Other findings of the PIR report on Standard 42 included the following:
- Statement 42 achieves the objective of establishing and clarifying guidance for accounting for insurance recoveries for all funds and activities.
- The capital asset impairment and insurance recovery information governments provide in their financial statements is important to users of financial statements. However, that information may be difficult for some users to understand and may not be as detailed or as comparable across governments as some users may wish.
- Most of Statement 42’s requirements are operational, but some stakeholders find certain aspects challenging. The primary operational concern, which was voiced by practitioners in particular, relates to the service utility approach and related techniques for measuring impairment of capital assets. According to the PIR report, Statement 42 requires impairment to be measured as the decline in the service utility using techniques that replicate the historical cost of the capital asset’s remaining service utility. The review team noted that two of the seven GASB members had dissented against issuing Statement 42 in 2003 because it does not allow business-type activities and enterprise funds to measure impairment using a cash flows approach.
- Statement 42 did not result in significant changes to financial reporting and operating practices, nor did it result in significant unanticipated consequences.
- The cost to implement Statement 42 and the continuing application costs generally are consistent with the costs that stakeholders expected.
- Statement 42’s expected benefits of improved user understanding for when capital asset impairments have occurred and enhanced comparability for insurance recovery information have been achieved. However, the expected benefit of improved user understanding of capital asset impairments’ financial impact on governments may not have been achieved to the extent expected.
As a result of the review, the PIR team recommended that the GASB conduct, at a minimum, a limited field test when proposing to issue a standard with new recognition or measurement approaches, and share the results with users to assess the usefulness of the resulting information.
In GASB’s response to the report, Vaudt wrote that the board considers field tests as “critical to the due process and appreciates the recommendation.”