February 28, 2003

Director of Research
Project No. 9-3E
Governmental Accounting Standards Board
401 Merritt 7, P.O. Box 5116
Norwalk, CT 06856-5116

RE:

Exposure Draft, Proposed Statement of the GASB Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Dear Sir:

On behalf of the Government and Nonprofit Section (Section) of the American Accounting Association, the Accounting and Auditing Standards Committee (Committee) appreciates the opportunity to comment on the above-referenced GASB exposure draft. The Committee, whose members are primarily academic accountants interested in governmental and nonprofit issues, reviews and responds to proposed standards of interest to the Section membership. The comments submitted are those of the Committee and do not necessarily represent the opinions of all members of the Government and Nonprofit Section or the American Accounting Association. Individual members may comment separately.

The Committee has responded to the questions/Issues raised in the Exposure Draft. Our comments and answers to the Issues are attached.

Again, we appreciate this opportunity to comment on the Exposure Draft. If you have any questions, or desire further details on the Committee's position, please contact me at 208-282-4292 or at pumplela@isu.edu at your convenience.

Respectfully,

Kitty Pumphrey
Lela D. "Kitty" Pumphrey, Chair
Accounting and Auditing Standards Committee
Government and Nonprofit Section of the American Accounting Association

Attachment

Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Comments

Issue 1
Paragraphs 7 through 14 identify indicators of impairment, the impairment test, and the specific methods for measuring impairment that generally would be used for capital assets that will continue to be used by the government. The Basis for Conclusion (in paragraphs 33-46) explains the Board's reasons for selecting these indicators, tests, and methods. Do you agree with the Board's proposal? Do you agree that measurement methods for capital assets that will continue to be used by the government should be based on historical cost? If not, which additional measurement method or methods should the Board prescribe? Why?

We have a question related to indicators of impairment and that question appears below.

We agree that assets continuing in use should be valued using the historical cost concept. We agree in principle with the tests and methods.

(Question) Paragraph 8 lists the common indicators of impairment. Included in this list are: Evidence of obsolescence due to technological development and a change in the manner or expected duration of the usage of a capital asset. Since the underlying assets retain their service capacity, should these events be considered together with events in which the underlying assets do not retain their service capacity, such as physical damage? Should the answer be the same for both categories? Since the change in the expected duration of usage of a capital asset (example, closure of a school prior to the end of its useful life) is entirely under the control of the governing body, should this be considered together with events outside of management control?

Issue 2
This proposal would apply the approach to identification and measurement of impairment to all capital assts (that is, governmental and subsidized capital assets (defined in paragraph 31) as well as business enterprise capital assets (also defined in paragraph 31)) rather than applying a cash flow approach to business enterprise capital assets. The Basis for Conclusion (in paragraphs 31 and 32) explains the Board's reasons for this decision. Do you agree with the Board's proposal? If not, why not?

We agree with the Board's decision. Minimizing the differences between the two sets of financial statements presented in the CAFR will reduce the stress for the preparers. Also, theoretically, we agree with the Board because no government-owned assets are truly held for the purpose of generating a profit. Even when the goal of a business-type entity is to generate a profit, governing boards frequently make political, social policy decisions about pricing the products or services.

Issue 3
This proposal would not require capital assets that are temporarily impaired to be written down. This proposal also would establish a criterion for determining whether an impairment is temporary by treating all impairments as permanent unless evidence is available to demonstrate that the impairment is temporary. The Basis for Conclusions (in paragraphs 49 and 50) explains the Board's reasons for this decision. Do you agree with the Board's proposal? If not, why not?

We agree with the Board's decision that temporary impairments should not cause the underlying asset to be written down.

Issue 4
The proposed Statement would require impairments indicated by a change in legal factors to be reported in the period that the change in law occurs, as discussed in paragraph 36 in the Basis for Conclusions and illustrated in Appendix C, illustration 3. Do you agree with the Board's position? If not, why not?

The requirement to recognize the impairment in the period in which the law is changed is consistent with other accounting standards requiring recognition in the period in which the underlying event occurs, so we agree with the Board.