Natural disasters can happen at any time, and it can be hard to react. Companies often have questions about how to account for the effects of a natural disaster, and that’s where insurance claims accounting comes in. This service provides businesses with the accounting and reporting guidance they need after experiencing a natural disaster like a hurricane. Here are the first two major steps that need to be taken after such an event.
Assest Impairments
After a natural disaster occurs, it’s possible that the storm may have triggered impairment indicators. In this case, an impairment test needs to be completed. Tax accountants will tell you that indicators of important might include:
- A significant decrease in the asset’s market price
- A significant negative change in the manner or extent in which a long-lived asset is used or in the physical condition of the asset.
- A current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its previously estimated useful life.
- The carrying amount of the entity’s net assets is more than its market capitalization.
- There is obvious evidence of physical damage or obsolescence of an asset.
If you are experiencing any of these indicators, you must run impairments tests. The order in which you conduct the tests can affect the results, so they need to be completed in the following order.
- Other assets (accounts receivable, inventories, etc.)
- Indefinite-lived intangible assets (other than goodwill)
- Long-lived assets (as an asset group)
- Goodwill
Insurance Recoveries
Most companies have insurance to protect them from financial losses as a result of natural disasters. The amount and timing of certain insurance procedures can complicate the related accounting. Insurance proceeds up to the number of losses recognized are considered recoveries and are then recorded when receipt is thought to be probable.
The loss created by the natural disaster and the related insurance recovery should take place in the same period. Appropriate disclosures in your financial statements regarding potential insurance recoveries are incredibly important. The accounting for insurance recoveries can be placed in the following categories:
- Other assets (accounts receivable, inventories, etc.)
- Indefinite-lived intangible assets (other than goodwill)
- Long-lived assets (as an asset group)
- Goodwill
The city-wide market value of taxable property for the 2017 fiscal year grew to more than one trillion dollars, seeing a 9.8% increase from the previous year. Natural disasters can, unfortunately, negatively impact the value of property in the affected area. If you own a business and have been hit by a natural disaster, contact us today so we can help you through your insurance claims accounting.
