As communities begin the process of recovering from the tragedy of a natural disaster, entities operating in those locations, or providing goods and services in them, raise questions about the related financial reporting effects. This narrative provides a reminder of the existing accounting requirements that should be considered when addressing the financial effects of natural disasters, including:
- Asset impairments– If an entity determines that the events resulting from a natural disaster have triggered impairment indicators, an impairment test must be performed in accordance with IAS 36 Impairment of Assets for the respective asset(s) and/or cash-generating unit(s). Natural disasters – Financial impact overview
- Insurance recoveries – An entity may incur costs to repair a damaged facility or determine that it has a liability to repair an environmental damage in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IAS 37 does not allow the recognition of contingent assets. Accordingly, an insurance recovery asset can only be recognised if it is determined that the entity has a valid insurance policy that includes cover for the incident and a claim will be settled by the insurer.
- Hedge accounting – Prior to the disaster, many transactions may have constituted ‘highly probable’ hedged transactions in cash flow hedges under IFRS 9 (or IAS 39, if applicable). However, purchases and sales that were considered highly probable a few weeks prior to the natural disaster, may no longer be highly probable (in full or partially) or may not be expected to occur at all. Natural disasters – Financial impact overview
- Restructuring – As a result of a natural disaster, an entity may decide to sell or abandon certain assets or execute a restructuring plan. A restructuring is a programme that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity or the manner in which business is conducted. IAS 37 addresses the accounting for costs associated with exit or disposal activities.
- Decommissioning obligations – Rather than allowing an entity to build up a provision for the required costs over the life of the facility, IAS 37 requires that the liability is recognised as soon as the obligation arises, which will normally be at commencement of operations. Similarly, IAS 16 requires the initial cost of an item of property, plant and equipment to include an estimate of the amount of the costs to dismantle and remove the item and restore the site on which it is located.
- Other considerations:
- Future operating losses – Future operating losses and costs do not meet the definition of a liability (because they do not arise from a present obligation resulting of a past event), and therefore are not recognised until incurred. Natural disasters – Financial impact overview
- Onerous contracts – A contract is considered onerous when the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
- Constructive obligations – Additional non-legal obligations may arise as a result of a natural disaster. For example, an entity with no previous environmental obligations may establish a constructive obligation that it will repair environmental damage as a result of the disaster.
- Contingent liabilities – A contingent liability is:
- A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, or Natural disasters – Financial impact overview
- A present obligation that arises from past events, but is not recognised because it is either not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or the amount of the obligation cannot be measured with sufficient reliability.Contingent liabilities are not recognised, but they are disclosed.
- Classification in the statement of other comprehensive income – IAS 1 requires that when items of income or expense (a term covering both profit or loss and other comprehensive income) are material, their nature and amount are disclosed separately.
- Financial statement disclosure requirements – The financial statement disclosure for entities directly and/or indirectly affected by natural disasters will vary depending on the magnitude of their losses and the availability of information. In many cases, the financial statement disclosure requirements are addressed based on the nature of the loss (e.g., asset impairments, hedging, decommissioning costs) or the timing of the loss (e.g., events after the reporting period).
Natural disasters may also trigger a number of regulatory reporting requirements. Entities should consider any applicable local regulatory reporting obligations that may give rise to additional disclosures about the direct and/or indirect effects of a natural disaster.