There may be no official accounting standards for natural disasters, but New Zealand is leading the way when it comes to corporate financial disclosures on such events
This article was first published in the February 2018 International edition of Accounting and Business magazine.
A couple of months after the Financial Stability Board (FSB) published its recommendations on climate-related financial disclosures last year, tropical storm Harvey and hurricanes Irma and Maria, along with severe monsoon flooding in western India and landslides and flooding in sub-Saharan Africa, provided ample evidence of why corporates need such guidance. Floods in the Philippines in late December hammered the point home.
The cost of Irma alone could reach US$300bn and the impact on businesses could last for years. Accounting for natural disasters has not proceeded at the pace of the 185-mile-an-hour winds, but it is beginning to climb corporate agendas across the globe.
After talking to users and preparers, the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) made recommendations applicable to organisations based on four areas (see box). FSB chair Mark Carney says: ‘The disclosures are essential to understanding a company’s climate-related risks and opportunities. Widespread adoption will provide investors, banks and insurers with that information, helping minimise the risk that market adjustments to climate change will be incomplete, late and potentially destabilising.’
One country that is ahead of the FSB and has led the way in thinking about natural disasters accounting is New Zealand, following earthquakes in 2011. Companies such as Lyttelton, Port of Christchurch, KiwiRail, and retail, property and personal financial services company Smiths City Group worked to disclose the earthquakes’ impact on their results.
In its 2011 annual report Lyttelton noted it had received a NZ$35.7m progress payment for both business interruption and material damage expenditure with another NZ$18m in progress. Its comprehensive income statement noted NZ$12m of extra costs and NZ$30m of assets written off or derecognised in a year when – to illustrate how material this was to the business – it made NZ$21m before accounting for the earthquakes’ effects. The company said it sustained major damage to its port infrastructure and facilities, as well as the loss of an estimated NZ$2.4m of revenue.
The Lyttelton report noted it had been unable to secure further business interruption cover, although it was working with its brokers to ‘build on the position’. Such disclosure gives an idea of the issues that all businesses would face after a rare but catastrophic event.
Simon Lee, KPMG’s New Zealand national technical director, Accounting Advisory Services, says: ‘The financial impact [of a natural disaster] needs to be reflected in the financial reporting. The implications range from the obvious – a building or some other asset lost or damaged – to the less obvious, such as an organisation’s ability to continue as a going concern.’
Going concern centres around the ability of the business to execute recovery plans if assets have been wiped out. Lee says companies need to check recoverability of assets. ‘If a company is owed money from goods or services that have been delivered to clients that may be affected, then that could impact their ability to pay the debt.’
It is also clear that best practice says there is no netting off: the cost of the asset impairment and any related insurance payout should be treated as two separate events.
While the FSB has highlighted natural disaster-related disclosures, Peter Clark, technical director at the London-based International Accounting Standards Board, notes that there is no special accounting treatment for natural disasters. He says: ‘With no specific standard it is a case of thinking through the implications from general standards. The most obvious is impairment: fixed assets that have been damaged by a storm. They would be accounted for in the same way as any other impairment. If they are destroyed, then effectively you have a disposal.
‘If you were covered by insurance there might be some question as to how likely it was that you would get the insurance; there is a little bit of discussion in the standards about this.’
Lee adds: ‘Readers [of the annual report] must have an appreciation of the broad impacts’ – over the short and the long term. Richard Howitt, chief executive of the International Integrated Reporting Council (IIRC), says: ‘The growing risk that companies associate with climate change and extreme weather events should be part of the risk analysis of reporting. Integrated reporting provides a long-term, balanced, material and relevant way for companies to address these issues.’
ACCA’s publication, Insights into Integrated Reporting, co-authored by Yen-Pei Chen, corporate reporting and tax manager in ACCA’s Professional Insights team, notes: ‘The likelihood of natural disasters is low, but the magnitude of their impact could be huge. On the other hand, focusing on such risks could mean that other more immediate risks are overlooked.’
Increasingly companies need to identify potential impacts of climate-related events on revenue, product mix, competitiveness, distribution channels, supply chains and cost of sales. Chen says that the key issue is materiality. Boards need to ensure they are clued up to discuss materiality in terms of, as the FSB suggests, market, technology, reputation, policy and legal, and physical.
It could be argued that for individuals and businesses caught up in a natural disaster, accounting for the event is the least of their worries. But as the storm subsides, corporate reporting and good stewardship need to be up to speed to play a part in the rebuilding process.
Peter Williams is an accountant and journalist
"The disclosures are essential to understanding a company’s climate-related risks and opportunities"