October 14, 2005 — The American Institute of Certified Public Accountants (AICPA) has issued two new Technical Practice Aids (TPA) to provide guidance to accountants and their clients affected by Hurricane Katrina. 

TPA 5400.05 – Accounting and Disclosures Guidance for Losses from Natural Disasters, and an outline under TIS Section 9070 – Subsequent Events

TPA 5400.05 addresses a key reporting question for business entities affected by a natural disaster.  “Should losses from a natural disaster be reported as extraordinary?” According to APB Opinion No. 30, “extraordinary is defined as both unusual in nature and nonrecurring.”  Hurricane Katrina caused both human and economic devastation but under restrictive accounting rules these losses are considered “ordinary” since hurricanes on the gulf coast occur every year and are expected to continue.  The TPA also identifies four financial accounting issues to be considered when reporting on affected entities:

• When should an asset impairment loss (when the carrying amount exceeds its fair value), related to a natural disaster be recognized? Follow the guidance in the following FASB Statements No. 144. 114, 142, and 5:
• SFAS 144 – Provides guidance on recognition and measurement of impairment losses on long-lived assets.
• SFAS 114 – Provides guidance on recognition and measurement of impairment losses on loans.
• SFAS 142 – Provides guidance on recognition and measurement of impairment losses on intangible assets and goodwill.
• SFAS 5 – Provides guidance on recognition and measurement of impairment losses on assets not covered by specific other literature.

• When should a liability for non-impairment losses and costs related to a natural disaster be recognized?  Follow guidance in FASB Statement No. 5, specifically Paragraph 8. It 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 the loss can be reasonably estimated.

• What is the accounting for insurance recoveries to cover losses sustained in a natural disaster and related business interruption insurance recoveries? Follow FASB Interpretation No.30 and FIN 30 which provide guidance for reporting involuntary conversions of non-monetary assets (such as property or equipment) to monetary assets (such as insurance proceeds).

• What are the required disclosures regarding the impact of a natural disaster?  Follow guidance in Paragraph 26 of APB Opinion No.30.

Technical Practice aid outline under TIS Section 9070 – Subsequent Events [Consideration of Impact of Losses From Natural Disasters Occurring After Completion of Audit Field Work and Signing of the Auditor’s Report But Before Issuance of the Auditor’s Report and Related Financial Statements]

This guidance addresses an auditor’s responsibilities with respect to consideration of a material subsequent event which occurred before the issuance of the Auditor’s Report and related financial statements.

A loss from a natural disaster occurring after year end would be considered a Type II subsequent event.  Under AU 560.05, these types of subsequent events should not result in an adjustment to the financial statements.  Some of these events, however, may be of such a nature that disclosure of them is required to keep the financial statement from being misleading.  Therefore, both management and the auditor should consider the appropriate disclosures.  It also follows that the natural disaster could have such an impact on the entity that the auditor should consider its ability to continue as a going concern.

For the full text of the Technical Practice Aids, go to www.aicpa.org/download/members/div/audistd/TPA-Subsequent Events.pdf and www.aicpa.org/members/div/acctstd/general/recent_tpas.asp

For more information, contact Cristi Resciniti at 215-564-1900 .

Back to News Archive