Natural disaster accounting: Nonmonetary asset conversion

Natural disasters like storms, floods, and fires can have a significant impact on tangible property. Companies often have questions about how to account for the effects of property damage caused by natural disasters under U.S. generally accepted accounting principles (GAAP). Organizations should carefully consider nonmonetary asset conversion and related insurance accounting as they account for the impact of a natural disaster on their properties.

Nonmonetary asset conversion

When a nonmonetary asset, real property, is involuntarily converted to a monetary asset, cash to repair or replace, the effects of that conversion must be recognized under ASC 605-40, Revenue Recognition – Gains and Losses. Companies that have already adopted ASC 606, Revenue from Contracts with Customers will find the same guidance in ASC 610-30, Revenue Recognition — Other Income — Gains and Losses on Involuntary Conversions.

An assessment is needed to ascertain the extent of the damage when determining the appropriate accounting treatment and if the event qualifies as an involuntary asset conversion.

• If only repairs and maintenance (R&M) are needed to bring the asset back to its original condition, then costs incurred to repair the damage are expensed. Insurance proceeds related to the R&M, if received during the same accounting period, are recognized as an offset to the expenses incurred.
• If the real property, or a component thereof, needs to be replaced, then a different approach is taken. The asset basis related to the damaged real property is determined and written off as a loss on disposal. Accumulated depreciation associated with the damaged and disposed asset is also written off as a loss on disposal. Next, costs incurred to replace the damaged real property are capitalized and placed into service as appropriate. Depreciation on the new asset is recorded according to the placed in service date and useful life of the new asset. Insurance proceeds, if received during the same accounting period, are recorded as a gain. Finally, the loss on disposal is net with the gain from insurance proceeds to reflect an overall net casualty loss or gain as presented on the income statement.