Accounting When Natural Disaster Hits

• February 21, 2023
• Robert Zuengler

Weather and climate disasters seem to be in the news more frequently in recent years. According to the National Centers for Environmental Information, in 2022 alone, there were 18 weather and climate events that included severe storms, tropical cyclones, flooding, and a wildfire. When natural disasters strike, there may be accounting entries needed to address repairs or loss of property and equipment, as well as accounting for insurance proceeds related to those losses.

First, an assessment of damage is needed so the proper accounting treatment can be considered. Can the asset be repaired to bring it back to its original condition or does the asset, or a portion of it, need to be replaced?

Once the damage assessment is performed, the following accounting considerations should be made: 

• Identify expenses associated with repairing the damage.
  • Recognize as repairs and maintenance expense (debit expense and credit cash or accounts payable).
  • If insurance proceeds are received in the same period as the cost of repairs was incurred, they are recognized as an offset to the repairs and maintenance expense.
• When real property needs to be replaced due to the damage, the property is written off as a loss on disposal.
  • Accumulated depreciation related to the asset will be written off as well.
  • The costs for the replacement are capitalized and placed in service with a new useful life determined.
  • Insurance proceeds are recognized as a gain. (If the insurance proceeds are received in the same period as the loss, the loss on disposal is netted with the gain from the insurance proceeds and presented on the statement of activities as an overall casualty loss or gain.)

Let’s review an example.  A roof with a cost basis of $50,000 and accumulated depreciation of $10,000 was torn off a building during a storm. The cost to replace the roof is $75,000, and the insurance proceeds are $45,000. The following entries would be made:

• The removal of the roof from the books would be recorded as a debit of $40,000 to loss on disposal of roof, a debit to accumulated depreciation of $10,000, and a credit to the property and equipment account for the cost basis of the roof of $50,000.
• The new roof would be recorded as a debit of $75,000 to property and equipment and a credit to cash or accounts payable of $75,000.
• When the insurance proceeds of $45,000 are received, there would be a debit to cash of $45,000 and a credit to gain on proceeds of $45,000.
• The above entries result in a net casualty gain of $5,000 ($40,000 loss on disposal and $45,000 gain on insurance proceeds.

For both repairs and replacements, if the amount of insurance proceeds cannot be determined until a subsequent period, the loss is still recognized in the period it is incurred.

This content was created by CLA’s Ann-Marie WalshLaRocca, Nonprofit Director.

Conclusion

Natural disasters may result in complex accounting situations.  CLA is here for you. Reach out for help.

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