Article
Natural disaster accounting: accounting and disclosure implications
Oct. 18, 2017 · Authored by David A. Johnson
In the wake of recent natural disasters such as hurricanes Harvey, Irma and Maria and the earthquake near Mexico City, it is important for companies to understand potential U.S. GAAP accounting implications. Even companies not directly impacted by these or other natural disasters may need to consider the potential accounting and / or disclosure implications of such events on their financial statements. Potential impacts range from impairment to insurance to going concern.
Impairment
Following a natural disaster companies need to evaluate their assets for potential impairment. The ordering of impairment tests can affect their results, therefore, it is important to perform them in the proper order. The proper order is as follows:
- other assets (e.g., inventories, accounts receivable, etc.),
- indefinite-lived intangible assets (other than goodwill)
- long-lived assets (as an asset group), and
- goodwill.
If impaired, the assets’ carrying values would be adjusted prior to the performance of the next impairment test. Assuming that this impairment evaluation is not part of the company’s required annual impairment tests, the company would begin their indefinite intangible asset, long-lived asset and goodwill impairment tests by determining whether events and circumstances related to the natural disaster indicate that the company’s assets may be impaired. If the events and circumstances indicate possible impairment, the company would complete the remainder of the impairment tests.
Companies should keep in mind that even if they are not located in an area affected by a natural disaster, events and circumstances related to a natural disaster could indicate that their assets may be impaired. For example, this could be the case for companies with significant customers or suppliers, collateralized loans or insurance liabilities of policy holders in an affected area.
Insurance
Companies, especially those located in areas at higher risk for natural disasters, typically maintain insurance to protect themselves against financial losses caused by natural disasters. Certain factors, such as the amount and timing of insurance proceeds can complicate the related accounting. U.S. GAAP requires the losses caused by natural disasters and related insurance recoveries be accounted for separately. Insurance proceeds up to the amount of losses recognized are considered recoveries and are recorded when receipt is considered probable (i.e., likely to occur).
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