GUIDELINES TO DETERMINE ASSET IMPAIRMENT AND REPORTING OF INSURANCE

RECOVERIES
ASSET IMPAIRMENT
STEP 1: Identify Potential I!"ai#!ent$ to Ca"ital A$$et$
The first step in the process is to identify potential impairments to capital assets. Identifying
potential impairments to capital assets may not necessarily lead to recording an impairment
loss. Refer to Step 1 of Exhibit 1 for a detailed decision tree.
%o& i$ a$$et i!"ai#!ent defined'
As stated above !AS" Statement #o. $% paragraphs & and ' define asset impairment as a
significant (nexpected decline in the service (tility of a capital asset.
Significant) The events or changes in circ(mstances that lead to impairments are not
considered to be normal and ordinary.
*nexpected) At the time the capital asset +as ac,(ired the event or change in
circ(mstance +o(ld not have been expected to occ(r d(ring the (sef(l life of the asset.
-ecline in service (tility ) A red(ction in the (sable capacity that at ac,(isition +as
expected to be (sed to provide service as disting(ished from the level of (tili.ation.
o The c(rrent (sable capacity of a capital asset that is less than its original (sable
capacity d(e to normal +ear and tear and expected decline in (sef(l life is not
considered to be an impairment/ ho+ever impairing events or changes in
circ(mstances that red(ce (sable capacity may indicate impairment.
o -ecreases in (tili.ation and existence of or increases in s(rpl(s capacity that
are not associated +ith a decline in (sable capacity are generally not considered
to be impairment.
%o& $(o)ld t(e in$tit)tion identify t(e "o")lation of "otential i!"ai#!ent$ to *a"ital
a$$et$'
It is important to highlight that the possible pop(lation of capital assets that have potential for
meeting the definition of impairment are identified thro(gh significant events or changes in
circ(mstances that may s(ggest that the service (tility of a capital asset may have declined
significantly and (nexpectedly. The g(idelines for identification are)
The events and circ(mstances are 0no+n by the instit(tion1s financial management and
are generally 0no+n from disc(ssions by the Regents senior management or the media.
At a minim(m Regents1 items pertaining to yo(r instit(tion d(ring the year sho(ld be
revie+ed and eval(ated. 2ther so(rces of information that sho(ld be (sed to identify
potential impairments to capital assets may incl(de the instit(tion1s press releases.
The events and circ(mstances are prominent conspic(o(s and as expressed above are
not considered to be normal and ordinary. Any 0no+n event sho(ld be properly reported
regardless of the amo(nt. In order to perform a revie+ for potential (n0no+n
circ(mstances they sho(ld be considered significant. The Texas State 3omptroller1s
2ffice has defined significance as the asset1s net boo0 val(e declined by 4&55555 or
more. Instit(tion revie+ efforts sho(ld foc(s on identifying events and circ(mstances that
may lead to potential impairments that are in excess of 4&55555.
The events and circ(mstances denote the presence of indicators of impairment.
%o& $(o)ld t(e in$tit)tion t#eat i!"ai#!ent$ t(at +e*o!e ,no&n d)#in- t(e o#dina#y
*o)#$e of +)$ine$$'
Absent s(ch significant events and circ(mstances described above instit(tion management is
not re,(ired to perform additional proced(res to identify potential impairments to capital assets.
6o+ever if d(ring the normal co(rse of recording transactions d(ring the year there are
insignificant events or circ(mstances that res(lt from any of the indicators of impairment as
o(tlined belo+ they sho(ld be recorded as o(tlined in this doc(ment. 7or example if there is a
fire in a laboratory that res(lts in a +rite8off of 4%&5555 in boo0 val(e of capital assets it sho(ld
be recorded as an 2perating Impairment 9oss as disc(ssed belo+ even tho(gh it did not res(lt
from the revie+ as o(tlined above that has been defined as a significant event or circ(mstance.
!AS" Statement #o. $% paragraph :$ excl(des considerations of impairment that may be
attrib(table to deferred maintenance or the condition of a capital asset.
.(at a#e t(e indi*ato#$ of i!"ai#!ent and (o& a#e t(ey defined'
The Statement o(tlines five common indicators of impairment. They are)
Evidence of physical damage s(ch as for a b(ilding damaged by fire or flood +hen the
level of damage is s(ch that restoration efforts are needed to restore service (tility.
Enactment or approval of la+s or reg(lations or other changes in environmental factors
s(ch as ne+ earth,(a0e standards that a facility does not meet and cannot be modified
to meet.
Technological development or evidence of obsolescence s(ch as that related to a ma;or
piece of diagnostic or research e,(ipment.
A change in the manner or expected d(ration of (se of a capital asset s(ch as clos(re of
a b(ilding prior to the end of its (sef(l life.
3onstr(ction stoppage s(ch as stoppage of constr(ction as a res(lt of a lac0 of f(nding.
I$ t(e#e a di$tin*tion +et&een a "e#!anent and te!"o#a#y i!"ai#!ent'
In the absence of compelling facts as disc(ssed in paragraph 1< of !AS" Statement #o. $% an
impairment sho(ld be considered permanent. 6o+ever in certain cases evidence may be
available to demonstrate that the impairment +ill be temporary. If that is the case the capital
asset sho(ld not be +ritten do+n.
Doe$ a *(an-e in de!and fo# t(e $e#/i*e$ of a *a"ital a$$et al&ay$ #e$)lt in an i!"ai#!ent
of a *a"ital a$$et'
A change in the demand for the services of a capital asset is not by itself considered to be an
indicator of an impairment of a capital asset and +o(ld not immediately res(lt in a concl(sion that
the asset sho(ld be incl(ded in the pop(lation of capital assets that are tested for impairment.
6o+ever changes in demand for the services of a capital asset may be ca(sed by one of the five
indicators of impairment disc(ssed above. In that case the capital asset sho(ld be incl(ded in the
pop(lation that is tested for impairment. An example is as follo+s)
-ecreased demand for the processing services of a mainframe comp(ter beca(se (sers have
transitioned to =3 and server8based systems sho(ld be considered a change in demand
associated +ith an indicator of impairment evidence of obsolescence and the mainframe sho(ld
be tested for impairment.
2n the other hand if the decreased demand for the processing services of a mainframe comp(ter
+as attrib(table to the concl(sion of a special pro;ect re,(iring large amo(nts of processing time
on the mainframe comp(ter that r(ns other applications it sho(ld not be considered to be a
change in demand associated +ith an indicator of impairment and a test of impairment is not
re,(ired.
If t(e Uni/e#$ity (a$ de*ided a *a"ital a$$et $(o)ld +e $old0 doe$ t(at de*i$ion al&ay$
#e$)lt in an i!"ai#!ent of a *a"ital a$$et'
A capital asset that the *niversity has decided to sell b(t is contin(ing to (se as originally
intended (ntil the sale occ(rs is not considered to exhibit a change in manner or expected
d(ration of (se. Therefore it +o(ld not be incl(ded in the pop(lation of capital assets that may
potentially be impaired. 6o+ever a capital asset that the *niversity has decided to sell and is not
contin(ing to (se is considered to exhibit a change in manner or expected d(ration of (se and
sho(ld be incl(ded in the pop(lation of capital assets that may potentially be impaired.
Examples of impairment are provided in !AS" Statement #o. $% paragraphs :$ thro(gh $>.
STEP 1: Pe#fo#! Te$t$ fo# I!"ai#!ent of Ca"ital A$$et$
If the concl(sion from Step 1 is that an indicator of impairment is present for certain capital
assets a potential impairment may exist and Step % a test for impairment m(st be performed on
the capital asset. Refer to Step % of Exhibit 1 for a detailed decision tree.
The test for impairment incl(des two factors. Both factors m(st be present in order to concl(de
that the capital asset is in fact impaired. The tests are)
The decline in service utility is unexpected. The restoration cost or other impairment
circ(mstance is not a part of the normal life cycle of the capital asset. ?anagement is not
expected to foresee +ith precision the (sef(l life of a capital asset or the service (tility
thro(gho(t its (sef(l life. 6o+ever there is a reasonable range of expectations abo(t the
service (tility and (sef(l life at the time of ac,(isition.
The magnitude of the decline in service utility is significant. The expenses associated
+ith contin(ed operation and maintenance @incl(ding depreciationA or costs associated
+ith restoration of the capital asset are significant in relationship to the c(rrent service
(tility. In cases +here there is physical damage to a capital asset the costs of restoration
may be relatively easy to determine at least +ithin a range of estimates and therefore
the significance can be ob;ectively assessed. The Texas State 3omptroller1s 2ffice has
defined significance as the asset1s net boo0 val(e declined by 4&55555 or more. In
circ(mstances other than those involving physical damage management1s action to
address the sit(ation is an indication that the expenses are too high in relation to the
benefit. If the "oard has not addressed the matter and management has not initiated any
action there may be a pres(mption absent other facts that the magnit(de of the decline
is not significant and this test +o(ld not be met.
If both factors are not present there is no impairment loss to meas(re and record. 6o+ever
!AS" Statement #o. $% paragraph 1B indicates that this does not mean that the estimate of the
remaining (sef(l life (sed in depreciation calc(lations sho(ld not be reeval(ated and shortened if
necessary. 3hanges to estimated (sef(l lives are acco(nted for on a prospective basis in f(t(re
depreciation expense.
STEP 2: Mea$)#e t(e I!"ai#!ent of Ca"ital A$$et$
If the res(lt from the tests in Step % is that both factors are present and there is a concl(sion that
there is an impairment of a capital asset then Step : m(st be performed in order to meas(re the
impairment. Refer to Step : of Exhibit 1 for a detailed decision tree.
The methods for meas(ring the impairment depend on +hether the capital asset +ill contin(e to
be (sed by the *niversity or not.
Fo# i!"ai#ed *a"ital a$$et$ t(at &ill *ontin)e to +e )$ed +y t(e Uni/e#$ity:
The portion of the historical cost that sho(ld be +ritten off depends on the indicator of impairment
associated +ith the capital asset and sho(ld be meas(red by the method described belo+ that
most appropriately reflects the decline in service (tility of the capital asset. The circ(mstances
(nder +hich each method can be (sed and a description of the methods for meas(ring
impairment are as follo+s)
o Method to be used to measure impaired capital assets attributable to the
evidence of physical damage indicator
Restoration cost approach. The amo(nt of impairment @portion of the
historical cost that sho(ld be +ritten offA is derived from the estimated
costs to restore the (tility of the capital asset. Restoration cost is the
amo(nt necessary to ret(rn the capital asset to its original condition and
does not incl(de any amo(nt attrib(table to improvements and additions.
The estimated restoration cost can be translated into the amo(nt of the
historical cost to be +ritten off (sing one of t+o approaches)
1. -eflating the estimated restoration cost (sing an appropriate cost index) #ote this
calc(lation is the most diffic(lt and the least (sed method. *T System recommends
(sing the Restoration 3ost Impairment method belo+ for capital assets +ith physical
damage. Sho(ld a (niversity choose the -eflated Restoration 3ost method *T System
has a template available for (se) *T System -eflated Estimated Restoration 3ost
Impairment 3alc(lator
-eflated restoration cost C 3arrying @boo0A val(e D Impairment loss
6istorical cost
Ehere)
-eflated restoration cost D 3(rrent restoration cost C FFFFFFFF1FFFFFF
@Average inflation index since original ac,(isitionA
n
n D n(mber of years since ac,(isition
%. 2r applying a ratio of estimated restoration cost over estimated replacement cost to
the net boo0 val(e of the capital asset. *T System has a template available for (se) *T
System Restoration 3ost Impairment 3alc(lator.
3(rrent restoration cost C 3arrying @boo0A val(e D Impairment loss
3(rrent total replacement cost
o Method to be used to measure impaired capital assets attributable to either the
a) enactment or approval of laws or regulations or other changes in
environmental factors, or b) "technological development or evidence of
obsolescence indicators
Service (nits approach. The historical cost of the service (tility of the
capital asset that cannot be (sed is isolated. The amo(nt of the
impairment is determined by eval(ating the service (nits thro(gho(t the
life of the capital asset before and after the impairment event. *T
System has a template available f(r (se) *T System Service *nits 3ost
Impairment 3alc(lator
#et "oo0 Gal(e 8 @ Ac,(isition cost C Remaining Service (nitsA D
Impairment loss
@original total service (nitsA
o Method to be used to measure impaired capital assets attributable to a change
in manner or duration of use indicator
Service (nits approach described above or
-eflated depreciated replacement cost. The historical cost of the service
prod(ced is replicated. A c(rrent cost for a capital asset to replace the
c(rrent level of service is estimated. This estimated c(rrent cost is then
depreciated to reflect the fact that the capital asset is not ne+ and then
is deflated to convert it to historical costs dollars. The difference bet+een
this res(lt and the historical cost in the financial system is the amo(nt of
the historical cost to be +ritten off. *T System has a template available
for (se) *T System -eflated -epreciated Replacement 3ost Impairment
3alc(lator
#et "oo0 val(e H @-epr c(rrent replacement cost C -eflation factorA D
Impairment loss
Ehere)
-eflation factor D 2riginal cost year index
3(rrent year index

Fo# i!"ai#ed *a"ital a$$et$ t(at &ill no lon-e# +e )$ed +y t(e Uni/e#$ity0 o#
*on$t#)*tion $to""a-e:
Impaired capital assets that +ill no longer be (sed by the *niversity or capital
assets impaired from constr(ction stoppage sho(ld be reported at the lo+er of
carrying val(e or fair val(e. The historical cost sho(ld be +ritten do+n to this
level. Transaction codes +ill need to be designated to disting(ish impairment
+rite8offs from ro(tine disposals. This +ill need to be similar to a partial disposal
b(t applied on a 9I72 basis to the amo(nts capitali.ed for the most recent years.
STEP 3: Re*o#d t(e I!"ai#!ent Lo$$ Att#i+)ta+le to Ca"ital A$$et$
If as a res(lt of +or0ing thro(gh Steps 18: above the concl(sion is that an
impairment loss for a partic(lar capital asset sho(ld be recorded it m(st be
reported in the *niversity1s statement of reven(es expendit(res and changes in
net assets in one of three categories) an operating impairment loss a special
impairment loss or an extraordinary impairment loss. Refer to Step $ of Exhibit 1
for a detailed decision tree.
2perating impairment loss. All impairment losses m(st be recorded as an
operating impairment loss (nless they specifically meet the definition of a special
or extraordinary impairment loss. 7or example a ma;or renovation of a instit(tion
b(ilding +here a portion of the existing str(ct(re has to be demolished or a fire
started in a laboratory that destroys a ma;or portion of a b(ilding may be
considered an operating impairment loss.
In the case of either a special or extraordinary impairment loss the loss is
classified +ithin the 2ther 3hanges in #et Assets section of the *niversity1s
statement of reven(es expenses and changes in net assets. The disting(ishing
feat(res bet+een an operating impairment loss and either a special or
extraordinary impairment loss depend on +hether the event or circ(mstance is
either (n(s(al infre,(ent or both. Gene#ally0 #e*o#din- an i!"ai#!ent lo$$
a$ $"e*ial and4o# e5t#ao#dina#y i$ diffi*)lt to 6)$tify7
Events or circ(mstances that are considered to be (n(s(al in nat(re sho(ld
possess a high degree of abnormality and be of a type clearly (nrelated to or
only incidentally related to the ordinary and typical activities of the *niversity
ta0ing into acco(nt the environment in +hich the *niversity operates. *n(s(al in
nat(re is not established by the fact that an event or transaction is beyond the
control of management.
Events or circ(mstances that are considered to be infre,(ent in occ(rrence
+o(ld not reasonably be expected to rec(r in the foreseeable f(t(re ta0ing into
acco(nt the environment in +hich the *niversity operates. =aragraphs %58%% of
A=" :5 provide a more detailed definition of (n(s(al in nat(re and infre,(ency in
occ(rrence.
The disting(ishing feat(res bet+een a special impairment loss and an
extraordinary impairment loss depend on +hether the event or circ(mstance is
+ithin the control of *niversity management.
Special impairment loss. The special impairment loss category incl(des
impairment losses that are associated +ith circ(mstances +ithin the
control of instit(tion or *niversity management and are either (n(s(al in
nat(re or infre,(ent in occ(rrence @!AS" Statement #o. :$ I&'A.
Extraordinary impairment loss . The extraordinary impairment loss
category incl(des losses that are not +ithin the control of instit(tion or
*niversity management and are both (n(s(al in nat(re and infre,(ent in
occ(rrence @!AS" Statement #o. :$ I&&A. -eloitte J To(che has
indicated that h(rricanes are not extraordinary for *T?" d(e to their
close proximity to the !(lf of ?exico.
Recogni.ing that differences among the three categories may be s(btle the *T
System 3ontroller1s 2ffice can assist in researching the appropriate category to
(se in any given sit(ation. In any event if the loss is recorded as an operating
loss it m(st also be recorded by the f(nction that (sed the capital asset. If the
loss is recorded as a special or extraordinary loss there is no need to identify the
loss by f(nction.
Impairment losses recogni.ed in accordance +ith !AS" Statement #o. $%
sho(ld not be reversed in f(t(re years even if the events or circ(mstances
ca(sing the impairment have changed.
Exhibit $ provides a +or0sheet designed for (se by instit(tions in order to
doc(ment the (ltimate financial reporting concl(sion for capital assets that are
identified as being potentially impaired.
STEP 8: Di$*lo$e t(e I!"ai#!ent Lo$$ Att#i+)ta+le to Ca"ital A$$et$
7or disclos(re p(rposes *T System +ill need the information on impaired capital
assets in order to disclose in the System1s footnotes a general description of the
asset impaired the event or circ(mstance that ca(sed the impairment the
amo(nt of the impairment and the acco(nt and f(nction +here the impairment
loss +as charged.
In addition the carrying amo(nts of impaired capital assets that are idle at year8
end m(st be disclosed regardless of +hether the impairment is considered
permanent or temporary.
Exhibits $ and & provide a +or0sheet and disclos(re items designed to capt(re
the information that +ill be needed to be prepared by instit(tions and s(bmitted
to the *T System 3ontroller1s 2ffice.
INSURANCE RECOVERIES
Restoration or replacement of an impaired capital asset sho(ld be reported as a
separate transaction from the impairment loss and associated ins(rance
recovery.
Ins(rance recoveries sho(ld be recogni.ed only +hen either reali.ed or
reali.able. 3learly if ins(rance proceeds have been received the recovery m(st
be recogni.ed and recorded. In addition if the ins(rance company has admitted
or ac0no+ledged coverage an ins(rance recovery +o(ld be reali.able and
sho(ld be recorded. If the ins(rer has denied coverage the ins(rance recovery
generally is not recogni.able.
In$)#an*e Re*o/e#ie$ Related to t(e I!"ai#!ent of Ca"ital A$$et$
Ins(rance recoveries are recorded and classified differently depending on
+hether the impairment loss and associated recovery occ(r in the same fiscal
year.
Ins(rance recovery reali.ed or reali.able in the same fiscal year as the
associated impairment loss. The impairment loss sho(ld be reported net
of the ins(rance recovery +hen the recovery and loss occ(r in the same
fiscal year
Ins(rance recovery reali.ed or reali.able in the s(bse,(ent fiscal year
as the associated impairment loss. If the ins(rance recovery is reali.ed
or reali.able in a s(bse,(ent year from the associated loss the reporting
+ill depend on +here the associated impairment loss +as initially
recorded)
Ins(rance recovery associated initially +ith an operating
impairment loss) Record the reali.ed or reali.able ins(rance
recovery in the nonoperating section of the *niversity1s
statement of reven(es expenses and changes in net assets.
Ins(rance recovery associated initially +ith a special impairment
loss) Record the reali.ed or reali.able ins(rance recovery in
special items in the 2ther 3hanges in #et Assets section of the
*niversity1s statement of reven(es expenses and changes in
net assets.
Ins(rance recovery associated initially +ith an extraordinary
impairment loss) Record the reali.ed or reali.able ins(rance
recovery in extraordinary items in the 2ther 3hanges in #et
Assets section of the *niversity1s statement of reven(es
expenses and changes in net assets.
Regardless of the timing of the ins(rance recovery it +ill be classified as
=roceeds from Ins(rance Recovery in the 3apital and Related 7inancing
Activities section of the statement of cash flo+s.
In$)#an*e Re*o/e#ie$ Un#elated to t(e I!"ai#!ent of Ca"ital A$$et$
9osses that are (nrelated to the impairment of capital assets +ill al+ays be
recorded as 2ther #onoperating Expenses regardless of +hether there is a
recovery.
Ins(rance recovery reali.ed or reali.able in the same fiscal year as the
associated loss sho(ld be reported net of the ins(rance recovery as
2ther #onoperating Expense.
Ins(rance recovery reali.ed or reali.able in the s(bse,(ent fiscal year
sho(ld be reported as 2ther #onoperating Income.
Regardless of the timing of the ins(rance recovery it +ill be classified as 2ther
Receipts in the #oncapital 7inancing Activities section of the statement of cash
flo+s.
In$)#an*e Re*o/e#ie$ Di$*lo$)#e
7or disclos(re p(rposes *T System +ill need the information on ins(rance
recoveries in order to disclose in the *niversity1s footnotes a general description
of the recovery the event or circ(mstance that ca(sed the recovery the amo(nt
of the recovery and the acco(nt and f(nction +here the recovery +as recorded.
Exhibits $ and & provide a +or0sheet and disclos(re items designed to capt(re
the information that +ill be needed to be prepared by the instit(tions and sent to
the *T System 2ffice of the 3ontroller.