In August 2017, Hurricane Harvey struck the southern United States, particularly affecting the state of Texas. This extreme weather event had significant consequences on businesses and infrastructure, and its impacts on accounting standards were profound. Hurricane Harvey caused widespread flooding and property damage, disrupting business operations and resulting in substantial financial losses for companies in the affected regions. The event highlighted the need to account for climate change risks and their potential financial implications.
Impacts on Accounting Standards of Climate Changes:
Asset Impairment: Many businesses in the affected areas had to reassess the carrying value of their assets due to flood damage caused by Hurricane Harvey. Accounting standards required companies to recognize impairments when the carrying value of an asset exceeded its recoverable amount. The flood damage necessitated impairment assessments and adjustments to reflect the reduced value of affected assets.
Contingent Liabilities: Companies affected by the hurricane faced various contingent liabilities, including property damage claims and potential environmental remediation costs. Accounting standards required businesses to evaluate and disclose these contingent liabilities, reflecting the potential financial impact resulting from the extreme weather event.
Disclosures on Climate-Related Risks: In the aftermath of Hurricane Harvey, there was an increased focus on climate-related risks in financial reporting. Companies were expected to disclose the potential impacts of similar extreme weather events on their operations, supply chains, and financial performance. This required businesses to assess and disclose the risks associated with climate change, emphasizing the importance of integrating climate-related factors into accounting standards.
Insurance Claims and Recoveries: Companies affected by the hurricane had to navigate insurance claims processes to recover financial losses. Accounting standards required businesses to assess the likelihood and amount of insurance claim recoveries and recognize them when virtually certain. This involved estimating the insurance proceeds expected to be received and disclosing them in financial statements.
In Short:
Hurricane Harvey serves as a real-world event that highlights the impact of climate change on accounting standards. The extreme weather event necessitated assessments of asset impairments, recognition of contingent liabilities, and increased disclosures on climate-related risks. It emphasized the need for businesses to account for climate change impacts in financial reporting and consider the potential financial consequences of extreme weather events. This event underscored the importance of integrating climate change considerations into accounting standards to enhance transparency and enable informed decision-making in a changing climate.
