Recently our audit team had been presented with an unusual circumstance regarding losses due to impairment of capital assets. While performing research surrounding this situation I was reminded of the three different ways a governmental agency can present a loss due to impairment, one of which is different from that of a private entity.
GASB Statement No. 42 defines impairment as an unexpected and significant decline in the service utility of a capital asset. This is pretty straight forward; however there are three different ways to present this in a government CAFR. According to the Blue Book or Governmental Accounting, Auditing, and Financial Reporting (GAAFR) “Gains and losses resulting from the impairment of capital assets should be treated as an adjustment to expense in the affected function, unless they qualify as special or extraordinary items. We all know what an extraordinary item is, an item that that is both unusual in nature and infrequent in occurrence. So what is a special item? A special item is unique to government entities in that you will not see any such items on private entity financial statements. A special item is defined as a significant item, subject to management’s control, that meet one, but not both of the criteria used for identifying extraordinary items. This means if you have an event that is unusual in nature to the government, but it frequently occurs, then you may have a special item. More likely to occur is an item that is infrequent in occurrence but it does not quite meet the criteria to be considered an unusual in nature type of item. This is more common because the criteria for meeting the “unusual in nature” requirement is that it has to possess a high degree of abnormality and be clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity. Lastly, the special item is reported in both the government-wide statement of activities and in the respective statement of revenues, expenditures and changes is fund balance or net assets for proprietary funds.
Brian Hemmerle, CPA