Published on 14/02/2011

A disaster, such as a fire or storm event, can have a number of implications for the preparation of financial statements. For reporting periods ending 30 June 2011, an entity affected by a disaster would need to give consideration to a number of matters in preparing its financial statements, including the following:-

Impairment of inventory – paragraph 28 of AASB 102 ‘Inventories’ states that the cost of inventories may not be recoverable if those inventories are damaged. AASB 102 requires the inventories to be written down to their net realisable value on an item-by-item basis or, if appropriate, on a group basis.
Impairment of financial assets (such as debtors) – paragraph 58 of AASB 139 ‘Financial Instruments: Recognition and Measurement’ requires entities to assess at the end of each reporting period whether there is any objective evidence that a financial asset (or group of such assets) is impaired. If such evidence exists, the entity is required to account for any impairment loss in accordance with paragraph 63 (financial assets carried at amortised cost), paragraph 66 (for financial assets carried at cost) or paragraph 67 (for available-for-sale financial assets) of AASB 139.
Impairment of property, plant and equipment – paragraph 12(e) of AASB 136 ‘Impairment of Assets’ identifies physical damage as one of a number of internal sources of information indicating impairment. An impairment loss is required to be recognised in respect of an impaired item of property, plant or equipment when the item’s recoverable amount is less than its carrying amount. AASB 136 defines recoverable amount as the higher of an asset’s (or cash generating unit’s) fair value less costs to sell and its value in use.
Impairment of goodwill and intangible assets – while goodwill and intangible assets cannot be physically damaged as such, their economic performance may be affected by a disaster, particularly if they are used in conjunction with physical assets that have been damaged. Paragraph 12(g) of AASB 136 identifies worse than expected economic performance as an internal source of information indicating impairment. It is relevant to note that goodwill and intangible assets with indefinite useful lives are required to be tested for impairment annually, irrespective of whether any impairment indicators exist.

Insurance recoveries and disaster relief payments
Paragraph 65 of AASB 116 requires compensation received and receivable by entities in respect of damage to property, plant or equipment to be included in profit or loss. A similar approach would apply in respect of compensation received or receivable in respect of other impaired assets, such as debtors. However, care should be taken in relation to recognising insurance recoveries receivable, particularly if the policyholder has not received confirmation from the insurer in relation to the losses or costs being claimed.

In many cases, anticipated insurance recoveries would meet the definition of a contingent asset in AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets’ (rather than an asset). In such circumstances, paragraph 89 of AASB 137 requires the policyholder to disclose a brief description of the nature of contingent assets at the end of the reporting period and, where practicable, an estimate of their financial effect.

In determining the potential financial impact of any contingent assets, it is important that the disclosures avoid giving misleading indications of the likelihood of income arising (paragraph 90 of AASB 137). To this end, a policyholder anticipating insurance recoveries should consider carefully the particular terms and conditions under the relevant insurance contract, and their implications for any potential payments. For instance:

Does the policy cover the types of losses or costs being claimed? Some insurance policies require the policyholder to specifically elect that they be covered for particular types of losses and costs, such as loss of gross profits, additional costs in resuming trade or avoiding a reduction in turnover, loss of rental income and claim preparation costs.
Has the policyholder nominated a sufficient declared value to cover the damages sustained to, for instance, inventory, plant or equipment? If not, the policyholder may be underinsured relative to the value of the insured assets.
Has the policyholder retained sufficient records in an offsite location to enable them to prove their loss?

It is also relevant to note that some insurers have adopted a policy of making ‘interim’ payments to policyholders, particularly to those affected by disasters. In some situations, such payments may bear some relationship to the extent and magnitude of the losses suffered, particularly when the policyholder has sound accounting systems. Nevertheless, interim insurance payments should not be taken as a definitive guide to the amount of compensation that will ultimately be received by the policyholder.

Events after the reporting period
Prior to finalising their financial statements, entities should give consideration to the requirements of AASB 110 ‘Events After the Reporting Date’ and their implications for account balances at the end of the reporting period.

AASB 110 distinguishes between adjustable and non-adjustable events after the reporting period.

Adjustable events after the reporting period are those events that occur between the end of the reporting period and the date when the financial statements are authorised for issue and that provide evidence of conditions that existed at the end of the reporting period. The Standard requires the effect of such events to be recognised in the financial statements by adjusting the relevant items.

In contrast, non-adjusting events after the reporting period are those events that occur between the end of the reporting period and the date when the financial statements are authorised for issue and that provide an indication of conditions that arose after the end of the reporting period. As such events do not represent a condition at the end of the reporting period, information in relation to their nature and financial impact should be disclosed in the notes (rather than adjusting the financial statements), subject to the materiality thresholds in AASB 1031 ‘Materiality’.

Going Concern
It is also important to consider whether, as a consequence of the disaster, the entity remains as a ‘going concern’. If management determines after the end of the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so, paragraph 14 of AASB 110 prohibits the entity from preparing its financial statements on a going concern basis. In addition, paragraph 25 of AASB 101 ‘Presentation of Financial Statements’ requires the entity to disclose:

the fact that the financial statements have not been prepared on a going concern basis;
the basis on which the financial statements have been prepared; and
why the entity is not regarded as a going concern.

Contact

Rob Mackay
T +61 3 8635 1800
rmackay@moorestephens.com.au

www.moorestephens.com.au