By Gary M. Caporicci (Senior Partner), Ahmed Badawi and Eileen Lin
Caporicci & Larson, Certified Public Accountants

The Governmental Accounting Standards Board (GASB) had issued four pronouncements that are effective for this fiscal years ending June 30, 2006.

Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Objectives
This statement establishes guidelines for the accounting and reporting requirements for the impairment of capital assets. The statement requires impairment of capital assets to be reported at the time the impairment occurs rather than as part of ongoing depreciation expense or upon retirement of the capital asset.

According to the statement, “Asset impairment is a significant and unexpected decline in the service utility of a capital asset.” In order to determine if a capital asset is impaired, the agency must first identify potential impairment and test for such impairment.

Impairment Determination and Measurement
Indicators of impairment are as follows: 1) physical damage, 2) laws and regulations that cause an asset’s utility to be impaired, 3) evidence of obsolescence, 4) a change in the life or the manner in the use of the asset, and 5) construction stoppage. However, certain criteria do not indicate capital asset impairment such as “a change in the demand for the services of the capital asset.”

The following tests should be performed to determine if impairment is evident: 1) determine if the magnitude of the decline in service utility is significant, and 2) determine if the decline in service utility is unexpected. Once it has been determined that the capital asset is impaired, the actions the agency takes will depend on whether the asset will continue to be used by the agency or whether the asset will be disposed of.

If the asset will be continued to be used by the agency, the impairment should be measured by the following methods: 1) the restoration cost approach, 2) service units approach, or 3) the deflated depreciated replacement cost approach.

The restoration cost approach requires the amount of the impairment to be equal to the amount of the estimated costs needed to restore the utility of the capital asset. This method can be used if the impairment is the result of physical damage.

The service units approach requires the amount of the impairment to be determined by comparing the asset’s service capabilities before and after the event that caused the impairment. This method can be used if the impairment was the result of a change in laws and regulations, obsolescence, or a change in the life of the asset or the manner in which it is being used.

The deflated depreciated replacement cost approach calculates impairment by estimating a current replacement cost for the asset at its current service level, depreciate the estimated cost to capture the age of the asset and deflate the result to convert it to historical cost. This approach can be used when the impairment is the result of a change in the life of the asset or the manner in which it is being used.

Impaired capital assets that will no longer be used by the agency should be reported at the lower of carrying value or fair value.

Losses from impaired capital assets should be reported in the Statement of Activities and the Statement of Revenues, Expenses, and Changes in Net Assets. These losses can be an operating expense, special item or extraordinary item depending on the nature of the impairment and the asset as defined in APB Opinion No. 30. If the impairment is determined to be temporary no write down of the asset is required. However, once impairment had been reported, it cannot be revered in future years even if the impairment no longer exists.

Insurance Recoveries
Impairments should be recorded net of any insurance recoveries. Restoration or replacement costs incurred for impaired capital assets should be reported as a separate transaction in both the Government-wide Financial Statements and in the Fund Financial Statements.

At year-end, the agency should disclose the carrying amount of idle impaired capital assets regardless of whether the impairment is permanent or temporary.

Statement No 44 - Economic Condition Reporting (The Statistical Section)

Objective and Improvements on Financial Reporting
The Objectives of the Statistical Section are to provide financial statement users with additional historical perspective, context, and detail to assist in using the information in the financial statements, notes to the financial statements, and required supplementary information to understand and assess a government’s economic condition.

The proposed statement would improve the understandability and usefulness of the statistical section information by addressing the comparability problems that have developed in practice by adding information from the new financial reporting model for state and local governments required by GASB Statement 34.

Implementation
Governments that prepare a statistical section for the first time in response to this statement (or that previously prepared a statistical section but did not present certain information) are encouraged, but not required, to report all required years of information retroactively. Governments are encouraged, but not required, to implement the government-wide information required by this Statement retroactively to the year they implemented Statement 34. If the information required by this Statement differs from information previously reported by governments, governments are encouraged, but not required, to restate or revise the information for previous years. If the information for previous years is not restated or revised, governments should clearly indicate the year of implementation of the information required by this Statement and explain the nature of the differences from prior information.

Information Presented in the Statistical Section:

As discussed above, there will be some new schedules which governments will have to prepare and new data which governments will have to compile, especially if the governments decide to implement this Statement retroactively to the year they implemented Statement 34. It is strongly recommended that governments start the implementation process early by preparing the required schedules and compiling the data necessary for those schedules in order to avoid last minuet implementation issues. Early implementation is strongly recommended.

Statement No. 46 - Net Assets Restricted by Enabling Legislation (an amendment of GASB No. 34)

The objective of this Statement is to enhance the usefulness and comparability of net asset information and to clarify the meaning of legally enforceable. And, this statement specifies accounting and financial reporting requirements for those restricted net assets.

Determining Legal Enforceability
Legal enforceability means that a government can be compelled by an external party- - such as citizens, public interest groups, or the judiciary- - to use resources created by enabling legislation only for the purposes specified by the legislation.

Generally, the enforceability of an enabling legislation restriction is determined by professional judgment.

Changes in Circumstances Related to Enabling Legislation
If a government passes new enabling legislation by establishing new legally enforceable restrictions, then from that period forward the resources under the new enabling legislation should be reported as restricted. Professional judgment should be used to determine if remaining balances accumulated under the original enabling legislation should continue to be reported as restricted.

If resources are used for a purpose other than those stipulated in the enabling legislation, governments need to reevaluate the legal enforceability of the restrictions.

Disclosure Requirement
Primary governments should disclose the amount of net assets at end of the reporting period that are restricted by enabling legislation in the notes to the financial statements.

Statement No. - 47 Accounting for Termination Benefits

This Statement establishes accounting standards for termination benefits.

Recognition Requirements
In financial statements prepared on the accrual basis of accounting, employers should recognize a liability and expense for voluntary termination benefits (for example, early-retirement incentives) when the offer is accepted and the amount can be estimated. A liability and expense for involuntary termination benefits (for example, severance benefits) should be recognized when a plan of termination has been approved by those with the authority to commit the government to the plan, the plan has been communicated to the employees, and the amount can be estimated.

In financial statements prepared on the modified accrual basis of accounting, liabilities and expenditures for termination benefits should be recognized to the extent the liabilities are normally expected to be liquidated with expendable available financial resources.

Measurement Requirements
Healthcare-related termination benefits that are provided as the result of a large-scale, age-related program (for example, an early-retirement incentive program that affects a significant portion of employees) should be measured at their discounted present values based on projected total claims costs (or age-adjusted premiums approximating claims costs) for terminated employees, with consideration given to the expected future healthcare cost trend rate.

Healthcare-related termination benefits that are not part of a large-scale, age-related termination program are permitted, but not required, to measure the cost of termination benefits based on projected claims costs for terminated employees. That is, in this circumstance, the cost of termination benefits may be based on unadjusted premiums.

The cost of non-healthcare-related termination benefits for which the benefit terms establish an obligation to pay specific amounts on fixed or determinable dates should be measured at the discounted present value of expected future benefit payments (including an assumption regarding changes in future cost levels during the periods covered by the employer’s commitment to provide the benefits).

If, however, the benefit terms do not establish an obligation to pay specific amounts on fixed or determinable dates, the cost of non-healthcare-related benefits should be calculated as either (a) the discounted present value of expected future benefit payments or (b) the undiscounted total of estimated future benefit payments at current cost levels.

Disclosure Requirements
This Statement requires employers to disclose a description of the termination benefit arrangement, the cost of the termination benefits (required in the period in which the employer becomes obligated if that information is not otherwise identifiable from information displayed on the face of the financial statements), and significant methods and assumptions used to determine termination benefit liabilities.