Presentation made by Jennifer Goodman at the 19th Annual Decosimo Accounting Forum, hosted by the University of North Alabama.

1. A Global Reach with a Local Perspective
University of North Alabama
19th Annual Decosimo Accounting Forum
July 22, 2011
www.decosimo.com
FINANCIAL REPORTING FOR NATURAL
DISASTERS
JENNIFER GOODMAN, CPA
Assurance Principal

2. Accounting issues associated with a
natural disaster
 How should losses be classified in the statement of
operations?
 When should an asset impairment loss be
recognized?
 When should a liability for non-impairment losses
and costs be recognized?
 What is the accounting for insurance recoveries to
cover losses sustained?
 What are the additional considerations related to
business interruption insurance recoveries?
 What are the required disclosures?

3. Classification of losses
 Extraordinary Items must be both:
 Unusual in Nature – possess a high degree of
abnormality (does not mean the event is beyond the
control of management)
AND
 Occur Infrequently - not reasonably expected to recur
in the foreseeable future taking into account the
environment in which the entity operates

4. Stringent rules extraordinary classification
The requirements to be extraordinary are very
stringent. The SEC generally will not allow
extraordinary treatment for:
 Settlement of litigation – in general litigation is a
normal cost of business
 Write-off of goodwill
 Natural disasters – if the region has a history of such
disasters

5. Stringent rules extraordinary classification
The severity of a natural catastrophe ordinarily would
not impact the determination of whether an item is
extraordinary if similar events with less severity
occur with relative frequency.
SEC staff commented at the AICPA Twentieth National
Conference that losses from Hurricane Andrew did
not meet the unusual criteria. Additionally, due to the
locality of the devastated businesses, the
infrequency of occurrence of severe windstorms
was not met either. Some registrants were totally
wiped out by the hurricane.

6. Is it an extraordinary item?
 A large portion of tobacco farmer crops are
destroyed by hail storm. Severe damage from hair
storms in the locality where the farmer grows
tobacco are rare.
 A citrus grower's Florida crop is severely damaged
by frost. The farmer is likely to lose 75% of his total
crop. Frost damage is normally experienced every
three or four years.

7. Is it an extraordinary item?
 A large portion of tobacco farmer crops are
destroyed by hail storm. YES – both infrequent in
occurrence and unusual
 A citrus grower's Florida crop is severely damaged
by frost. NO - Not infrequent in occurrence taking
into account the environment in which the entity
operates

8. Is it an extraordinary item?
 A steel fabricating entity sells the only land it owns.
The land was acquired 10 years ago for expansion
but shortly thereafter the entity abandoned all plans
and held the land for appreciation.
 An entity that operates a chain of warehouses sells
excess land surrounding one of its warehouses.
When the entity buys property to establish a new
warehouse, it buys more land than it expects to use
for the warehouse expecting that the land will
appreciate in value. In the past 5 years, there have
been two instances where the entity sold such
excess land.

9. Is it an extraordinary item?
 A steel fabricating entity sells the only land it owns.
YES – Infrequent of occurrence because not past
history of event and unusual for a steel fabricator to
hold land for appreciation i.e. not their line of
business AND they never used in the business
 An entity that operates a chain of warehouses sells
excess land surrounding one of its warehouses. NO -
criterion of infrequency of occurrence has not been
met; past experience indicates sales may reasonably
be expected to recur in the foreseeable future

10. Is it an extraordinary item?
 A fire destroys 30% of a manufacturing plant. This
was the first fire effecting the company in its 15
years of existence. The Company had to ship
products off to be painted for the next 6 months
while the finishing and painting area was rebuilt.
 A textile manufacturer with only one plant moves to
another location. It has not relocated a plant in 20
years and has no plans to do so in the foreseeable
future. How should moving cost and losses be
treated?

11. Is it an extraordinary item?
 A fire destroys 30% of a manufacturing plant. NO -
reasonably expected to recur in the foreseeable
future considering the environment in which an
entity operates i.e. manufacture/industrial plant with
combustion supplies
 A textile manufacturer with only one plant moves to
another location. NO - moving to another location is
an occurrence which is a consequence of customary
and continuing business activities, some of which
are finding more favorable labor markets, more
modern facilities, and proximity to customers or
suppliers

12. Asset Impairments – held and used
 Impairment loss is recognized only if the carrying amount
of a long-lived asset is not recoverable and exceeds its
fair value.
 The carrying amount is not recoverable if it exceeds the
sum of undiscounted cash flows expected to result from
the use and eventual disposition of the asset.
 A long-lived asset shall be tested for recoverability
whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable.
 Example: A significant adverse change in the extent or
manner in which a long-lived asset is being used or in its
physical condition.

13. Asset impairments – to be abandoned
Long-Lived Assets to Be Abandoned:
A long-lived asset to be abandoned is disposed of when
it ceases to be used. If an entity commits to a plan to
abandon a long-lived asset before the end of its
previously estimated useful life, depreciation estimates
shall be revised to reflect the use of the asset over its
shortened useful life.
When a long-lived asset ceases to be used, the carrying
amount of the asset should equal its salvage value, if any.
A long-lived asset that has been temporarily idled shall
not be accounted for as if abandoned.

14. Asset Impairments – idle property
 In general, idle property should continue to be depreciated
and assets should be segregated on the balance sheet or
footnotes.
 When idleness is other than temporary, this may require a
write-down to fair value less cost to sale on the date
management decides the item will no longer be used. Under
these circumstances the items should no longer be
depreciated.
 When the period of idleness is other than temporary, the
assets should be transferred to Other Assets in the period the
determination is made.

15. Liability for cost related to a natural disaster
FASB ASC 450-20-25-2 requires a loss accrual by a
charge to income, if it is probable that an asset had
been impaired or a liability had been incurred at the
date of the financial statements and the amount of
loss can be reasonably estimated.

16. Liability for cost related to a natural disaster
Paragraph 63 of FASB Concepts Statement No. 5,
Recognition and Measurement in Financial Statements of
Business Enterprises, states liabilities should be
recognized when:
a. the item meets the definition of a liability (probable future
sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or
provide services to other entities in the future as a result of
past transactions or events)
b. the liability can be measured with sufficient reliability.
c. the information about the liability is capable of making a
difference in user decisions.
d. the information about the liability is representationally
faithful, verifiable, and neutral.

17. Accounting for insurance recoveries
FASB ASC 605-40 clarifies the accounting for involuntary
conversions of nonmonetary assets (property or
equipment) to monetary assets (insurance proceeds).
 Not equivalent to an exchange transaction
 Recognize gain or loss to the extent the cost of a
nonmonetary asset differs from the amount of monetary
assets received
 Doesn’t matter if the entity is obligated to reinvest the
monetary assets in replacement nonmonetary assets
 Cost of subsequently acquired nonmonetary assets is
recorded for consideration paid and not affected by a
previous transaction

18. Accounting for insurance recoveries
If a nonmonetary asset is destroyed or damaged in one
accounting period, and the amount of monetary
assets to be received is not determinable until a
subsequent accounting period, gain or loss shall be
recognized as discussed in chapter 450
Contingencies.

19. Accounting for insurance recoveries
 Treatment is slightly different for recovery gain
contingencies verses “normal” gain contingencies
 Recovery of a recorded contingent loss shall be
recognized when realization of the recovery is
deemed probable (i.e., likely to happen).
 Recovery of an amount in excess of the related
recorded contingent loss shall be recognized only
when all contingencies relating to recovery have
been resolved

20. Presentation of insurance recoveries
Disclose:
 A description of the nature and amount of recoveries
recognized.
 A description of recoveries that have not yet been
recognized in the financial statements but that are
reasonably expected to impact the entity’s financial
statements in the near term.
Consider disclosing:
 The estimated time frame for realization of
recognized probable recoveries, if realization is not
expected in the near term.

21. Presentation of extraordinary items
Extraordinary items shall be segregated from the results of
ordinary operations and shown separately in the income
statement with disclosure of the nature and amounts:
Income before extraordinary items $ XXX
Extraordinary items (less income tax of $ ___) XXX
Net income $ XXX
The nature of an extraordinary event or transaction and the
principal items entering into the determination of an
extraordinary gain or loss shall be described.

22. Presentation of unusual or infrequent items
Report as a separate component of income from
continuing operations. The nature and financial
effects of each event shall be disclosed on the face
of the income statement or, alternatively, in notes to
financial statements.
Items shall not be reported on the face of the income
statement net of income taxes or in any other
manner that may imply that they are extraordinary
items.

23. Additional consideration for business
interruption
 An entity may choose how to classify business
interruption insurance recoveries in the statement of
operations, as long as that classification is not contrary
to existing GAAP.
 The following shall be disclosed in the footnotes in the
period business interruption insurance recoveries are
recognized:
 Nature of the event resulting in business interruption
losses, and
 Aggregate amount of business interruption insurance
recoveries recognized during the period and the line
item(s) in the statement of operations in which those
recoveries are classified.

24. Entity’s evidence is destroyed
 Third standard of field work states: “The auditor
must obtain sufficient appropriate audit evidence by
performing audit procedures to afford a reasonable
basis for an opinion regarding the financial
statements under audit.”
 If substantially all of an entity’s evidence in support
of their financial statements has been destroyed and
the auditor has been unable to complete audit
procedures, the auditor should disclaim an opinion
on the financial statements as the auditor is unable
to form an opinion as to the fairness of presentation
of the financial statements.
 Independent auditor’s report example on next slide.

25. We were engaged to audit the accompanying balance sheets of X Company
as of December 31, 20X2 and 20X1, and the related statements of income,
retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management.
Substantially all of the Company’s books of original entry; the general and
subsidiary ledgers; related accounting manuals; records such as work
sheets and spreadsheets supporting cost allocations, computations, and
reconciliations; as well as substantially all corroborating evidence in
support of the financial statements were destroyed by _____ which also
destroyed the Company’s headquarters. The records that remain are not
sufficient to permit the application of auditing procedures that would be
adequate for us to express an opinion on the accompanying financial
statements.
Since the Company was not able to provide evidence or corroborating
evidence in support of the accompanying financial statements and we
were not able to apply other auditing procedures to satisfy ourselves as to
whether the financial statements are presented in accordance with
generally accepted accounting principles, the scope of our work was not
sufficient to enable us to express, and we do not express, an opinion on
the financial statements.

26. Audit documentation is destroyed
 Choices: 1) recreate the audit documentation 2) re-
perform the audit procedures and create new audit
documentation.
 Audit documentation should be sufficient to (a) enable
members of the engagement team with supervision and
review responsibilities to understand the nature, timing,
extent, and results of procedures performed, and the
evidence obtained; (b) indicate the team member who
performed and reviewed the work; and (c) show that the
accounting records agree or reconcile with the financial
statements.
 Auditor will usually have to re-perform the audit
procedures and create new audit documentation.

27. Event occurs after year-end
 Type II subsequent event; no adjustment to the
financial statements
 Consider disclosure to keep financial statements
from being misleading
 Extremely significant, consider pro forma balance
sheet
 Material impact on entity, consider emphasis of
matter paragraph
 Does event cause substantial doubt about ability to
continue as a going concern?

28. Accounting literature
 FASB Accounting Standards Codification 225,
Income Statement, 20 Extraordinary and Unusual
Items
 AICPA Technical Questions and Answers, Section
5400: Extraordinary and Unusual Items
 AICPA Technical Questions and Answers, Section
8345: Audit Evidence - Destruction of Documents
 AICPA Technical Questions and Answers, Section
9070: Subsequent Events

29. PRESENTATION AND DISCLOSURE EXAMPLES

30. Connect with me
Jennifer Goodman, CPA
Assurance Principal
423.756.7100
jennifergoodman@decosimo.com
On LinkedIn:
http://www.linkedin.com/pub/jennife
r-goodman/25/7b1/49a
Disclaimer: The contents of this presentation are for informational purposes only. The information is not intended to be a substitute for
professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have
regarding your financial goals or specific situations.