Natural Disasters and Their Impacts on Resorts: Strategic and Accounting Considerations
In the vast and intricate tapestry of Earth’s dynamic ecosystems, natural disasters emerge as awe-inspiring yet devastating phenomena that have changed how we approach our day-to-day lives and manage our property. In recent years, there seems to have been an uptick in the frequency and devastation from the earth-shattering tremors of earthquakes, the emptiness left behind by fires and flooding, and the majestic fury of hurricanes and tornadoes, to name a few. This unyielding force of nature’s disturbances is a powerful reminder of our vulnerability.
In the face of these inevitably recurring threats, resorts are increasingly adopting proactive measures to enhance their preparedness and resilience. Robust infrastructure designed to withstand extreme weather, comprehensive evacuation plans, and partnerships with local emergency services all contribute to minimizing the impact of natural disasters on resort operations and ensuring the safety of guests and staff. Preferably in the offseason or in advance of potential disasters, stakeholders should make efforts to prepare for potential catastrophic events. The first step is to build and approve a disaster recovery plan that is adaptive to changing circumstances and events and considers both minor damage and complete losses. Important aspects of this plan should include establishing an emergency management team to develop it and should consider the results of a comprehensive risk assessment based on the resort’s demographics, likelihood of potential risks, and potential countermeasures. Once this is completed, the team should determine efficient emergency evacuation plans, establish secured on-site or offsite storage sites for critical operating documents and information technology, evaluate existing and necessary insurance coverage, and consider the need for reserves to cover emergency repairs and insurance deductibles.
Federal resources and tools related to disaster preparedness and recovery are available on the Federal Emergency Management Agency (FEMA) and Disaster Assistance Improvement Program (DAIP) websites. The Small Business Administration (SBA) may also provide some opportunities for support through the disaster loan and other programs.
Accounting for Insurance Recoveries
In the ever-changing landscape of resort operations, unforeseen events can disrupt even the most well-established properties. Natural disasters, accidents, and other unexpected incidents can lead to financial losses that jeopardize a resort’s financial capabilities and stability. Thankfully, property and other types of insurance provide a crucial safety net, offering a means to recover from such setbacks. However, properly accounting for insurance proceeds and recoveries is a complex process that requires careful attention to financial reporting standards and regulatory requirements.
Related: Accounting for Disasters and Insurance Proceeds: Is Your resort Prepared?
Estimating and Recognizing Losses
It’s important to note that insurance recoveries are not a direct replacement for the full financial impact of the loss. Instead, they represent a means to mitigate the losses suffered. Therefore, a company must carefully assess the extent of the damage and record the corresponding loss in its financial statements. Under US GAAP, the extent of a loss can represent any costs necessary to bring the property back to working order, including but not limited to contractor costs, sales taxes, assembly, and installation. For vacation ownership resorts, these costs can include those typically recognized in the replacement fund as well as general repairs and maintenance. The loss and related liabilities should be recognized in the period when the insured event occurs (expenses should not be deferred as an asset on the balance sheet).
In many cases, insurance proceeds are received in a different period than the related outflow for expenses is incurred. As a result, revenue and expenses could be recognized in different periods resulting in drastic reporting differences from year to year.
Recording and Recognition
When a covered event occurs, a company typically files an insurance claim to initiate the process. Since the exact amount of the insurance claim is determined by the insurance policy terms and the assessed losses or damages, it is not always known until later in the process. In accounting terms, an insurance claim represents a gain contingency. If a claim and subsequent reimbursement are still pending at the reporting date (e.g., December 31, 2023), the receivable and corresponding gain should not be accrued until the realization of the insurance recoveries is estimable and probable. Under US GAAP, probable is defined as “likely to occur” and should consider whether all contingencies related to the claim have been resolved. If the insurance claim is subject to litigation, settlement negotiations, adjustor evaluations, or other uncertainties, it is generally not considered probable and likely not estimable either.
When insurance recoveries become both probable and estimable, the entity can record them in the financial statements. Resort properties may have capitalized assets under traditional GAAP, while other properties’ assets consist of common property (e.g., timeshare resorts reporting under common interest realty accounting). If the insurance recoveries relate to a capitalized asset, the entity should recognize a gain or loss from the difference between the carrying value disposed of and the proceeds received. On the other hand, if the insurance claims relate to assets that have not been capitalized, the proceeds should be recorded as revenue in the financial statements.
Under GAAP and IFRS, insurance proceeds and recoveries are recorded as separate gains in the income statement. This gain helps offset the loss that was initially recognized. However, the gain is presented separately from the company’s core operating activities to ensure transparency in financial reporting. Insurance recoveries receivable and associated liabilities for repairs do not generally meet the conditions to offset and should be recorded separately on the balance sheet. Since the insurance carrier is not the entity engaged to complete the repairs, the association would not have the legal right to offset unpaid claims with incurred repair or re-construction costs.
In addition to property recovery claims, there are other considerations for property owners, stakeholders, those charged with governance, and management companies to consider assisting in the recovery of the resort property or association.
Related: Moving Forward From Recent Natural Disasters
Business Interruption Claims
Following catastrophic events, power outages, inaccessibility, and other circumstances could cause a property to temporarily or indefinitely cease operations. This will greatly impact the cash flows of the resort and the ability to meet its financial obligations. Many insurance policies include some sort of business interruption loss, including lost rental income or lost revenue from resort operations (e.g., food and beverage, recreation activities). Accounting for business interruption claims follows the same gain contingency accounting noted above.
Special Assessments
Often, claim recoveries take a substantial amount of time and/or provide proceeds that ae substantially less than the actual cost to replace lost revenue or property. In these circumstances, common interest realty associations (e.g., timeshare associations, condominium associations, etc.) have the ability to approve a special assessment to the owners to help expedite increased cash flows and fund any gaps between an insurance recovery and the costs incurred. In doing so, keep in mind that under US GAAP revenue recognition, these revenues likely represent a contract liability (similar to replacement fund assessments) which are recognized as a liability and only earned as the purpose for which they were assessed has been met. This can be done within the replacement fund, or, in some cases, a separate fund (for tracking purposes) as approved by the governing board.
Disclosure and Transparency:
Transparent and accurate financial reporting is essential when accounting for insurance proceeds and recoveries. Companies must provide comprehensive disclosures in their financial statements and footnotes to communicate the impact of insurance-related transactions on their financial position, results of operations, and cash flows. These disclosures, which may also represent subsequent events after the reporting date, enable owners, investors, creditors, and other stakeholders to understand the company’s risk management strategy and the potential effects of insurance on its financial performance. In addition, a destructive event could lead to going concern and impairment considerations that management should evaluate to determine the need for analysis or disclosure that would be relevant to a reader of the financial statements.
Accounting for insurance proceeds and recoveries is a critical aspect of financial management, ensuring that a company can recover and rebuild after unexpected losses. Properly recording these transactions in accordance with accounting standards and regulatory requirements enhances transparency, safeguards financial stability, and demonstrates a company’s resilience in the face of adversity. By navigating the complexities of insurance accounting, businesses can better navigate uncertainties and safeguard their financial well-being.
The recent frequent occurrences of natural disasters stand as unwavering reminders of the unpredictable and humbling forces shaping our planet. While science and technology continue to unravel the intricacies of these cataclysmic events, their inherent complexity defies easy prediction. Our ability to adapt, prepare, account, and report for these disasters remains imperative in a world where the unknown remains ever-present. Resort stakeholders should consult a professional to ensure they are capturing the transactions that are occurring in the proper way and be sure to properly disclose such matters in the financial statements to keep owners and stakeholders properly informed of events.
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Withum is a forward-thinking, technology-driven advisory and accounting firm, committed to helping clients in the hospitality industry be more profitable, efficient, and productive in the modern business landscape. For further information about Withum and their cybersecurity, digital advisory and hospitality services teams, contact Lena Combs (LCombs@Withum.com) at (407) 849-1569, or visit www.withum.com/hospitality.
