Reporting a Disaster’s Effects on Your Financial Statements

stress distress disaster

Written by Curt Bach

September 22, 2020

The COVID-19 pandemic has provided many lessons for business owners. One is how to report the impact of a disaster on a company’s financial statements. Under U.S. Generally Accepted Accounting Principles (GAAP), disasters such as this year’s crisis are referred to as “subsequent events,” of which there are two types:

1. Recognized Subsequent Events

These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.

2. Nonrecognized Subsequent Events

These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet date. Rather, they arose after that date but before the financial statements were issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).

So, for example, the World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until Jan. 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the risk was present in China on Dec. 31, 2019. Accordingly, calendar-year entities may have needed to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020. Contact our firm for help with your financial statements.

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Curt Bach
I joined Hawkins Ash CPAs in August 2010, and am currently a manager in the firm’s Medford office. I provide a variety of tax services, including trust and estate tax preparation and planning. I have more than nine years of experience providing audit and tax services to nonprofit organizations, governmental entities and small businesses. I am a member of our firm’s tax committee and not-for-profit service group.

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