Questions: When should the entity recognise losses from a natural disaster?
Answer: Entities that are affected by a natural disaster prior to the balance sheet date should reflect the implications in the statement of comprehensive income and the balance sheet. The statement of comprehensive income and balance sheet is not affected when an entity is affected by a natural disaster after the balance sheet date unless the entity is no longer able to continue as a going concern, although the implications of the disaster should be disclosed.
Questions: When are provisions for future operating costs or future business recovery costs recognised?
Answer:TAS 37 does not permit provisions for future operating costs or future business recovery costs. The costs of repairing damage and cleaning up assets are not a present obligation until they have been incurred and should not be provided for until they have been incurred. Management might disclose an estimate of the clean-up costs expected to be incurred in the future before the recognition threshold for a provision has been met.
All of these events (and others) can affect an entity’s future profitability. Management should assess whether the disaster is an indicator of impairment.
TAS 36, ‘Impairment of assets’, prescribes the approach for assessing the carrying amount of non-financial assets including physical assets, goodwill and intangibles. Some physical assets that have been damaged may need to be written off immediately. Other assets, together with goodwill and intangible assets, should be tested for impairment to determine the effect of the disasters on the recoverable amount (at the cash-generating unit or groups of cash-generating units level).
When the disaster is an indicator of goodwill impairment, it should be tested for impairment even if it was tested earlier in the reporting period.
Questions: When does the entity recognise recovery from insurance claim?
Answer: A reimbursement should only be recognised when the receipt of the compensation is virtually certain; for example, once the claim has been accepted by the insurer.
The reimbursement shall be treated as a separate asset. However, in the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.
Insurance proceeds should be classified within the statement of cash flows based on the nature of the insured item, rather than on how management plans to utilise the proceeds. Insurance proceeds that relate to an investing activity (such as destroyed fixed assets) are an investing cash inflow. Insurance proceeds that relate to an operating activity (such as inventory losses or business interruption) are an operating cash inflow.