Academic journal article The Journal of Government Financial Management

Hurricanes, Tornadoes and Other Disasters

Academic journal article The Journal of Government Financial Management

Hurricanes, Tornadoes and Other Disasters

Article excerpt

Reporting Their Effect Applying GASB 42

Municipal governments are on the front lines of disaster response. Every year, municipal employees are faced with the destruction caused by hurricanes and tornadoes, but 2005 was the busiest and costliest Atlantic hurricane season on record.

Four hurricanes that year-Katrina, Wilma, Dennis and Rita-caused catastrophic damage to parts of the United States. The 2005 season produced a total of 27 named storms and 13 hurricanes. The damage done to the Gulf Coast by Katrina and Rita alone produced the largest displacement of Americans in history, according to the Federal Emergency Management Agency (FEMA). In addition, upwards of 30 tornadoes formed in late October and November, causing extensive property damage throughout Illinois, Indiana and the Ohio Valley regions.

These natural disasters took their toll on local government facilities -schools, libraries and civic centers, to name a few. In addition to making repairs, local governments also must determine how to reflect this activity in their financial statements.

A new accounting standard provides guidance on how to report typical damage done to buildings and other capital assets from a natural disaster. GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, also provides guidance on accounting and reporting issues related to insurance and FEMA recoveries.

The Basics of GASB Statement No. 42

This new accounting standard contains several different types of approaches for measuring and reporting capital asset impairments. As an overview, the standard describes five different types of indicators that a capital asset may be impaired. It identifies two tests that must be met when determining if an impairment loss should be reported. It provides guidance for measuring and reporting a loss if an asset is taken out of service, as well as for an asset remaining in service, depending on the type of impairment.

The accounting standard covers a number of ways a capital asset may become impaired. The following is a list of specific indicators contained in Statement No. 42 that should be used to determine if a capital asset is impaired:

* Evidence of physical damage

* Changes in legal or environmental factors

* Technological changes or obsolescence

* Changes in manner or duration of use

* Construction stoppage

The typical case from a natural disaster would be physical damage. However, a natural disaster may bring about a change in manner or duration of use. For example, a jail may be converted to warehouse space.

Merely having one or more of these indicators does not by itself result in an impairment loss. Two tests must be met before an impairment loss is reported. The tests are:

* The magnitude of the decline in service utility is significant.

* The decline in service utility is unexpected.

Events or changes in circumstance that indicate impairment should be prominent. For example, such events or changes in circumstance may have prompted discussion by the governing board, management or been covered by the media. Clearly, many of the capital assets damaged in the hurricanes along the Gulf Coast would have met both of these tests.

Measuring Impairment Loss

Impairment losses should only be recorded for capital assets that are permanently impaired. The presumption is that most capital asset impairments are permanent, but a government can provide evidence that an impairment of a capital asset is temporary. For example, a school may be closed for a short time, but based on population data, may be scheduled to reopen in a couple of years. If a capital asset is taken out of service, the asset should be written down to its lower of carrying value or fair value. Such a write-down would be reported in the statement of activities in the government-wide statements. …

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