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Administrative Procedure 8.555 Administrative Procedure 8.555
Impairment of Capital Assets and Retirement of Real Property
Administrative Procedure Chapter 8, Business and Finance
Administrative Procedure 8.555, Impairment of Capital Assets and Retirement of Real Property
Effective Date: April 2017
Prior Dates Amended: This administrative procedure merges elements of A8.553, General Improvement Write-Off, November 2001 into A8.555, Impairment of Capital Assets, August 2008
Responsible Office: Office of the Vice President for Budget and Finance/Chief Financial Officer
Governing Board and/or Executive Policy: EP 1.102, Authority to Manage and Control the Operations of the Campus
Review Date: August 2018
To establish the guidelines for reporting and accounting of impaired capital assets in accordance with Governmental Accounting Standards Board (GASB) Statement No. 42 and the general responsibilities for reporting and recording the retirement of University-owned real property.
A. Impairment – A significant, unexpected decline in the service utility of a capital asset, which includes property, plant, and equipment. Service utility is defined as the usable capacity that a capital asset was expected to provide at its acquisition. The events or changes in circumstances that lead to the Impairment are not considered normal or ordinary. There are two typical situations when Impairment occurs:
- The level of usable capacity of the existing capital asset has been significantly reduced due to a decline in service utility or safety or economic reasons;
- Capital projects are canceled due to special circumstances, i.e. ,lack of continuous funding, or construction stoppage.
B. Real Property – All land, structures, firmly attached and integrated equipment on the land and all interests in the property.
C. Retirement of Real Property – Removal from service of Real Property assets due primarily to damage beyond repair, worn beyond utilization, or exchanged with no profit to the University.
III. Administrative Procedure
A. Notification of Capital Asset Impairment
1. Departmental Fiscal Administrators should be aware of the status of capital assets under their purview to ensure that any Impairments are reported to the Capital Asset Accounting Office (CAAO) via memorandum as soon as they occur. The memorandum should include:
a. The date the incident occurred.
b. The percentage of Impairment and/or dollar amount.
c. A description of the incident.
d. Location of the incident.
2. The CAAO is responsible for determining the proper accounting for impaired capital assets based on the information provided.
B. Assessment of Impairment
The determination of whether a capital asset has been impaired is a two-step process: 1) Identifying potential Impairments; 2) Testing for Impairment. The events or circumstances affecting a capital asset that may indicate Impairment are prominent – that is, conspicuous or otherwise known to the University. Refer to Attachment 1 for a flowchart presentation of the capital asset Impairment decision process.
1. Identifying Potential Impairments
a. Evidence of physical damage, such as for a building damaged by fire or flood, when the level of damage requires restoration efforts to restore service utility.
b. Enactment or approval of laws or regulations or other changes in environmental factors, such as a new water quality standard that a water treatment plant does not meet and cannot be modified to meet the new requirements.
c. Technological change or evidence of obsolescence, such as that related to a major piece of diagnostic or research equipment (e.g., a magnetic resonance imaging machine or scanning electron microscope) that is rarely used because newer equipment provides better service.
d. Change in the manner or expected duration of use of a capital asset, such as closure of a school prior to the end of its useful life.
e. Construction stoppage, such as stoppage of a building due to lack of funding.
2. Testing for Impairment
a. Capital assets shall be considered impaired when both of the following factors are present:
(1) The magnitude of the decline in service utility is significant in relation to the service utility of the asset.
(2) The decline in service utility is unexpected. The restoration cost or other Impairment circumstance is not part of the normal life cycle of the capital asset.
b. If the above Impairment tests are met, the capital asset is considered to be impaired. However, only losses from permanent Impairments of capital assets should be recognized in the financial statements as GASB 42 provides that Impairment losses recognized should not be reversed in future years. An example of an Impairment that is likely to be temporary would be the closure of a middle school due to declining enrollment. This asset should not be written down if evidence of enrollment projections substantiated by elementary school enrollment, residential development data, birth rates, or other economic indicators demonstrates that the closure would be temporary.
c. When an event or circumstance indicates that a capital asset may be impaired, but the test determines that Impairment has not occurred, the estimates used in depreciation calculation (i.e., remaining estimated useful life and salvage value) should be reevaluated and changed if necessary.
3. Measurement of Impairment
Losses on impaired capital assets that the University will continue to use should be determined using the method that reflects the diminished service utility of the capital asset. GASB 42 prescribes three different methods.
a. Restorations cost approach – This approach uses the estimated cost to restore the capital asset and to identify the portion of the historical cost of the capital asset that should be written off. This approach should be used for Impairments resulting from physical damage.
b. Service units approach – This method estimates the total or maximum service units that the asset could have provided both before and after the Impairment event or change in circumstance. The percentage change in units would be applied to the carrying value of the capital asset to determine the amount of the Impairment loss. Impairments resulting from enactment or approval of laws or regulations, changes in environmental factors or from technological development or obsolescence generally should be measured with this approach.
c. Deflated depreciated replacement cost approach – This approach quantifies the cost of the service currently being provided by the capital asset and converts that cost into historical cost. The difference between the resulting depreciated, deflated replacement cost and the carrying value of the original asset represents the Impairment loss. Assets impaired by a change in manner or duration of use should be measured using this approach or a service units approach. Refer to Attachment 2 for a flowchart presentation of the measurement of asset.
4. Capital Project Impairments
In order to expand, improve or maintain the University’s facilities and infrastructure, capital projects (i.e., new construction or expansion, renovation, or replacement projects) are routinely initiated or conducted. However, there are instances when capital projects in progress are canceled, which results in capital asset Impairment.
a. Examples of Capital Project Impairments
(1) Project cancelled due to lack of funding.
(2) Project cancelled in the design phase or stopped due to special circumstances.
b. To report a capital project Impairment, a memorandum needs to be completed by the responsible capital project office and submitted to CAAO with a copy to the Campus Chancellor, the Director of Financial Management Office and Controller, and the Vice President for Administration with the following information:
(1) Project number
(2) Project scope
(3) Board or departmental approval to start the project
(4) Project location
(5) All contract (e.g., construction contract, architect/engineering services contract, construction management contract) numbers and the vendor name
(6) Last payment date
(7) Chart code, account number, and funding source
(8) Total project amount
(9) Impairment amount
(10) Reason for discontinuing the project
(11) Project Manager signature and date
(12) Facilities Fiscal Administrator signature and date
(13) Office of Capital Improvements Fiscal Administrator (GO Bonds) signature and date
(14) Director of Facilities or Office of Capital Improvements signature and date
5. Reporting Impairment Losses
GASB 42 requires the recognition of capital asset Impairments as soon as they occur. Losses from permanent Impairments should be recognized in the statement of revenues, expenses, and changes in net assets as a program or operating expense, special item, or extraordinary item, in accordance with the guidance in paragraphs 41-46, 55, 56, 101, and 102 of GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments. The only Impairment type that would typically qualify as a special item (i.e., within the control of management) would be a change in manner or duration of use.
6. Insurance Recoveries
a. The restoration or replacement of the impaired capital asset should be reported as a separate transaction from the Impairment loss and insurance recovery.
b. The Impairment loss should be reported net of the associated insurance recovery when the loss and recovery occur in the same fiscal year.
c. Insurance recoveries reported in years subsequent to the Impairment loss should be reported as program revenue, non-operating revenue, or extraordinary items, as appropriate.
7. Appropriations Received in Lieu of Insurance Recoveries
State appropriations and Federal grants (i.e., FEMA grants) should not be netted against any associated Impairment loss. Insurance recoveries are netted with associated Impairment losses because the insurance recovery is received in accordance with an insurance contract in effect prior to the Impairment event. Federal and State financial assistance is provided after the Impairment event occurs and in some instances only after a government applies for and meets applicable grant requirements. Such awards constitute separate transactions from the Impairment event (GASB’s Comprehensive Implementation Guide – 2005, question 7.469).
C. Retirement of Real Property
1. Exchange of Real Property
a. The Office of Capital Improvements shall notify the CAAO of any exchanges of Real Property via memorandum and attach copies of exchange documentation.
b. The CAAO shall record the Real Property exchange in the University’s capital asset management module.
2. Demolition of Real Property
a. The responsible campus facilities management office shall notify the CAAO of any Real Property assets that have been or will be demolished via memorandum and provide any requested documentation.
b. The CAAO shall record the retirement of the Real Property asset in the University’s capital asset management module.
IV. Delegation of Authority
There is no administrative specific delegation of authority.
V. Contact Information
Capital Asset Accounting Office, 956-8735, or firstname.lastname@example.org
A. Link to superseded Executive Policies in old format https://www.hawaii.edu/policy/archives/ep/
B. Link to Administrative Procedures in old format https://www.hawaii.edu/policy/archives/apm/sysap.php
VII. Exhibits and Appendices
Attachment 1: Asset Impairment Decision Process
Attachment 2: Measurement of Asset Impairment
Vice President for Budget and Finance/Chief Financial Officer
May 15, 2017
Topicsimpairment; real property; capital project; retirement