Fixed Assets—Some
Accounting Problems
*6.3A Impairment of Long-Lived Assets (New) *6.4 Separate Building Fund
*(b) Capitalization
*(c) PP&E Accounting (New) *p. 81. Insert before Section 6.4:
6.3A
IMPAIRMENT OF LONG-LIVED ASSETS (NEW)
When should a not-for-profit organization recognize an impairment of one or more of its long-lived (usually fixed) assets for accounting and reporting purposes? It is clearly not practical to routinely reappraise fixed assets, nor is there any requirement to do so. However, when there is a change in an asset’s use or a known decline in its market value (among other changes), then the organization must measure the poten-tial impairment of its carrying value. The question is whether the asset is still worth the amount at which it is carried on the books.For example, consider the case of an organization that is located in a geographic area in which property values have declined significantly. Suppose the organization had purchased a building for $1 million four years ago, and the building now has a book value of $900,000. The organization should evaluate the asset to see if it has been impaired, perhaps by obtaining a current appraisal. Since obtaining a new outside appraisal may not be feasible or cost effective, accountants may make a comparison of estimated future cash flows derived from use
of the asset with the current net book value of the asset. If future net cash flows equal or exceed the book value, then the asset is not considered impaired, and vice versa. (The actual calcula-tions are somewhat more complicated than are indicated here, but this discussion gives the reader the right idea.)
It is not always possible to identify specific cash flows with specific assets. In recognition of this fact, the accounting standard permits the test to be made at an entity-wide level, by comparing the values of all the organization’s assets with the total of its estimated future cash flows. In other words, a college might deliberately set its dormitory fees below cost, in which case it probably would set its tuition, endowment income, and other revenue sources at levels to make up the shortfall in housing revenues and cover other operating costs. Under these circumstances, the test is met on an enterprise-wide basis. This is not an uncommon practice at many institutions.
These accounting standards discuss impairment:
• Financial Accounting Standards Board (FASB) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which was issued in
March 1995
• FASB No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which was issued in August 2001
Although FASB No. 144 retains the fundamental measurement provisions of FASB No. 121, it supercedes FASB No. 121 as well as the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
FASB No. 144 applies to recognized long-lived assets of an entity to be held and used or to be disposed of, including the following:
• Capital leases of lessees
• Long-lived assets of lessors subject to operating leases • Long-term prepaid assets
Impairment in Statement No. 144 is defined as the condition
that exists when the carrying amount of an asset2.1to be held and
used exceeds its fair value. Organizations would test a long-lived asset for impairment using the sum of the undiscounted future cash flows that would be expected to result from the use and eventual disposition of the asset, excluding interest charges. For practical reasons, however, Statement No. 144 would not require that an impairment loss be recognized unless the carrying amount of the asset is not recoverable.
Under FASB No. 144, a long-lived asset to be disposed of by sale should be held at the lower of its carrying amount or fair value less cost to sell. The entity that holds the asset should stop depreciating the asset. To resolve some of the implementation issues that had been encountered with Statement No. 121, Statement No. 144 establishes additional criteria to determine when a long-lived asset is held for sale:
• The asset must be available for immediate sale in its current condition, subject only to terms that are usual and customary for sales of such assets.
• The sale of the asset must be probable, and its transfer expected to qualify for recognition as a completed sale, within one year, with certain exceptions.
In June 2001, the FASB released Statement No. 143,
Accounting for Asset Retirement Obligations. This Statement
addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated assets’ retirement costs. This Statement applies to all entities, including not-for-profit organizations. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, develop-ment, and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract,
under the doctrine of promissory estoppel. Statement No. 143 amends FASB Statement No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies.
According to Statement No. 143, organizations should recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred—if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of fair value can be made.
When initially recognizing a liability for an asset retirement obligation, an organization should capitalize its asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. An organization should subsequently allocate the asset retirement cost to expense using a systematic and rational method over its useful life.
Examples of situations where an asset retirement obligation and asset retirement costs might need to be recorded by a not-for-profit organization would include, among others:
• The removal of an underground fuel storage tank • The dismantling of a cogeneration plant
• Executory costs in lease agreements (e.g., a requirement to undo modifications made to leased property)
Statement No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Initial application of this Statement should occur at the beginning of an entity’s fiscal year.
When initially applying this Statement, an organization should recognize the following items in its statement of financial position:
• A liability for any existing asset retirement obligations adjusted for cumulative accretion to the date of adoption of this Statement
• An asset retirement cost capitalized as an increase to the carrying amount of the associated long-lived asset • Accumulated depreciation on the capitalized cost
Amounts resulting from an initial application of Statement No. 143 should be measured using current (i.e, as of the date of adoption of this Statement) information, current assumptions, and current interest rates. The amount recognized as an asset retirement cost should be measured as of the date the asset retirement obligation was incurred. Cumulative accretion and accumulated depreciation should be measured for the time period from the date the liability would have been recognized had the provisions of this Statement been in effect to the date of adoption of the Statement. Appendix D of the Statement provides examples that illustrate application of the transition provisions of the Statement.
An entity should recognize the cumulative effect of initially applying Statement No. 143 as a change in accounting principle as described in paragraph 20 of Opinion No. 20. The amount to be reported as a cumulative-effect adjustment in the Statement of Operations is the difference between the amounts, if any, recognized in the statement of financial position prior to the application of Statement No. 143 and the net amount that is recognized in the statement of financial position pursuant to the preceding paragraph.
6.4
SEPARATE BUILDING FUND
(b)
Capitalization
*p. 84. Insert at end of Section 6.4(b):
(c)
PP&E Accounting (New)
In 2001, the American Institute of Certified Public Accountants (AICPA) and the FASB started a project to address accounting and disclosure for property, plant, and equipment (PP&E) by nonprofit organizations. The three overarching principles of the project were:
1. PP&E assets should be depreciated over their expected useful lives.
2. Replacement assets and the assets replaced should not both be recognized as assets on an entity’s books at the same time.
3. PP&E assets should be recorded at cost.
Property, Plant and Equipment
At its September meeting, AcSEC2.2 approved a final SOP,
Accounting for Certain Costs and Activities Related to Property, Plant and Equipment, subject to AcSEC clearance of certain
revisions and FASB clearance. As of this writing at January 19, 2004, the SOP is expected to be published shortly. For more information, visit the AICPA’s Web site at www.aicpa.org (go to the “Accounting Standards” section) or visit the FASB’s Web site at www.fasb.org (go to the “Project Activities” section).
2.2AcSEC is the Accounting Standards Executive Committee, the technical committee that is authorized to speak on behalf of the AICPA.
