Hurricane damage: Accounting considerations
INSIGHT ARTICLE |
Assets: Destroyed, damaged and replaced
All assets destroyed by a hurricane should be written off to expense. This includes, but is not limited to, roofs, buildings, golf courses, irrigation systems, furniture and equipment. For partial disposals, a reasonable method should be adopted to determine how much of the asset was destroyed. All disposal dates should be the date of the hurricane.
It also is important to evaluate whether any losses related to property damage have been properly recorded. The club should not automatically record the property’s full book value as a loss, or an amount determined by an insurance adjustor. The loss should take salvage or resale value into consideration, and assets impacted by changes in future cash flows (e.g. revenue declines due to future demand) may need to be tested for impairment following the guidance in ASC 360, Property, Plant, and Equipment.
Hurricane related expenditures
Expenditures that are not capitalizable should be expensed as incurred.
Expenditures accrued at year-end must meet the definition of a liability and be reliably measurable.
Many of the losses and costs resulting from hurricanes do not qualify for immediate recognition as a liability. For example, costs of restoring a club's grounds, facilities, etc. whether capitalizable or not, should be recognized as the restoration efforts occur. The mere fact that a club intends to incur costs as a result of the hurricane, or are committed to incur costs, does not necessarily mean that those costs should be immediately recognized as a liability.
Clubs should present hurricane-related items on their statement of activities or statement of revenues and expenses (for a Common Interest Realty Associations (CIRA) club) in a manner that is consistent with the performance measurement indicator outlined in their accounting policies. Typically, this will result in these items being presented as nonoperating on the club’s financial statements. Hurricane-related items would include hurricane expenditures that are expense items, along with certain related insurance recoveries and special assessment income (See discussions below: Hurricane-related expenses typically include:
- Cleanup of debris: tree removal, stump grinding, etc.
- Equipment rental: chainsaws, tractors, trailers, etc.
- Interior flooding cleanup and dry out
Labor can be a huge cost of hurricane cleanup and should not be overlooked. All labor costs directly attributable to hurricane-restoration efforts (contract and in-house) should be separated out of operating payroll accounts. Contract labor is not always available after natural disasters, such as hurricanes. In-house employees helping with the cleanup of debris or restoring areas to get operations ready for business should be included in hurricane labor costs. Detailed time records should be maintained supporting the fact that personnel worked directly on hurricane-related matters.
When faced with property damage and other losses that a club has insured itself against, questions often arise with respect to the accounting for that property damage and any related insurance recoveries. Specifically, where a loss is sustained in one fiscal period, but the related insurance recovery is not received until the next fiscal period, questions arise about the timing and amount of potential insurance recoveries to be recorded. Because FASB Accounting Standards Codification (ASC) 450, Contingencies, limits the recognition of gain contingencies, the accounting for insurance recoveries can be more complex than you might expect.
A potential property and casualty insurance recovery should be evaluated using a loss recovery model. If recovery is probable, the company should recognize a receivable only to the extent of the amount of the loss recognized in the financial statements. Any amounts in excess of the recognized loss should be accounted for as a gain contingency and not recognized until it is realized or realizable (typically, when the insurance company has acknowledged the claim and is processing the payment for the company). The insurance recovery should generally be reported on a separate line item from the loss and should not be recorded as a reduction in the cost to rebuild or replace the damaged asset.
The recovery of a loss generally would be probable if there is a legally enforceable contract that stipulates the terms of the insurance coverage, and the terms are not in dispute nor is there any reason to believe they would be disputed. If the claim is the subject of litigation, a rebuttable presumption exists that realization is not probable. For certain claims, it may be necessary to obtain written confirmation from legal counsel that the claim is actually covered by the insurance policy.
A gain or loss should be recognized when a nonmonetary asset (such as property or equipment) is involuntarily converted to monetary assets (such as insurance proceeds), even though the club reinvests or is obligated to reinvest the monetary assets to replace the nonmonetary assets.
The analysis of when to recognize insurance recoveries for business interruption insurance could be more complex because the loss of expected revenue is not deemed to be "a loss recognized in the financial statements.” Accordingly, the entire amount of any potential recovery would be evaluated to determine whether it is a gain contingency or a valid receivable. The ultimate recovery under a business interruption policy is highly judgmental and typically, subject to substantial negotiations between the insured and the insurance company. Accordingly, it may be difficult to conclude that any potential gain is not a gain contingency, meaning the gain should not be recognized until realized.
Recognition of special assessment income to cover hurricane expenditures may be treated differently depending on a number of factors, including whether the club is a traditional nonprofit club or a CIRA and whether the assessment was structured specifically as a capital assessment or more generally. Please contact your RSM advisor as soon as hurricane assessments are contemplated by your club board for a discussion on the appropriate accounting treatment.