Asset Impairment

1. Asset Impairment Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries GASB 42 Presented by Jeff L. Smith, CPA June 18, 2009

2. Case Study: Accounting treatment for Pier 7 damage: impairment or not? Background: In 2008, equipment damaged a section of the pier Survey identified structural weaknesses Repair costs $300 to $500 thousand Assume that two other sections in a similar condition Original cost was $11.5 million Remaining book value as of December 2008 is $5.4 million. Background: In late 2008, a piece of equipment cause significant damage to a section of the pier. Since that incident, the port re-directed some (breakbulk) cargos to another facility (Blair Terminal) and surveyed a 600-ft section of the pier to assess its load-bearing ability. The survey identified several areas where structural weaknesses exist as a result of erosion and rotting. Two additional 600-ft sections of the pier have yet to be surveyed. The engineer estimates that the repair costs for the surveyed sections would be $300 to $500 thousand and assumes that the other two sections are likely to be in a similar condition. The original cost of the pier structure was $11.5 million and the remaining book value as of December 2008 is $5.4 million. Background: In late 2008, a piece of equipment cause significant damage to a section of the pier. Since that incident, the port re-directed some (breakbulk) cargos to another facility (Blair Terminal) and surveyed a 600-ft section of the pier to assess its load-bearing ability. The survey identified several areas where structural weaknesses exist as a result of erosion and rotting. Two additional 600-ft sections of the pier have yet to be surveyed. The engineer estimates that the repair costs for the surveyed sections would be $300 to $500 thousand and assumes that the other two sections are likely to be in a similar condition. The original cost of the pier structure was $11.5 million and the remaining book value as of December 2008 is $5.4 million.

3. Case Study: Accounting treatment for Pier 7 damage: impairment or not? GASB 42: asset is impaired if it meets the following two criteria: The magnitude of the decline in service utility is significant, and The decline in service utility is unexpected. If the asset will continue to be used, then the amount of the impairment is determined using one of the three (3) approaches Impairments resulting from physical damage are generally to be measured using the Restoration Cost Approach. Asset Impairment Per GASB 42, an asset is considered to be impaired if it meets the following two criteria: 1) The magnitude of the decline in service utility is significant, and 2) The decline in service utility is unexpected. When the asset is determined to be impaired, it may or may not continue to be used. If the asset will continue to be used, then the amount of the impairment is determined using on of the three (3) approaches identified by GASB 42. Impairments resulting from physical damage are generally to be measured using the Restoration Cost Approach. Asset Impairment Per GASB 42, an asset is considered to be impaired if it meets the following two criteria: 1) The magnitude of the decline in service utility is significant, and 2) The decline in service utility is unexpected. When the asset is determined to be impaired, it may or may not continue to be used. If the asset will continue to be used, then the amount of the impairment is determined using on of the three (3) approaches identified by GASB 42. Impairments resulting from physical damage are generally to be measured using the Restoration Cost Approach.

4. Case Study: Accounting treatment for Pier 7 damage: impairment or not? Restoration Cost Approach, calculates impairment as: