Municipalities record lease impairment under GASB 87
A drop in an asset’s service utility doesn’t always mean impairment is present. Assets lose service utility over time naturally. For example, a piece of machinery wears down and eventually breaks.
Impairment is usually caused by something unexpected. For example, a natural disaster, such as flooding or fires, can damage or destroy assets. These may be grounds for lease impairment.
When an impairment occurs, the lessee starts by calculating the impairment loss amount. GASB 87 paragraph 34 instructs the lessee on how to recognize the loss.
The lessor may restructure lease payments to account for this impairment. This can impact the lease liability.
If so, the lessee adjusts the underlying asset by the amount of change in the lease liability resulting from the service utility reduction. The asset’s balance is adjusted for the impairment as well by crediting the leased asset and debiting impairment loss.
Example:
Imagine flooding damages equipment leased by a municipality, reducing its service utility severely. The underlying asset before the flooding was $106,000, and the lease liability before the flooding was $100,000. After the flooding, the remaining utility of the equipment is deemed to be $50,000.
The lessor agrees to adjust payments to account for this situation, reducing the lease liability by $20,000.
What’s important here?
A drop in an asset’s service utility doesn’t always mean impairment is present. Impairment is unexpected and may be caused by a natural disaster, flood, or fire. This impairment is recognized as an expense in the statement of activities and as a reduction in the carrying amount of the lease asset or liability on the statement of net position.
