Media Release - 15 September 2010
Senior Communications Manager
Ernst & Young
+64 274 899 700
Counting the cost of the earthquake
16 September 2010
Ernst & Young recommends that business owners document everything during the earthquake recovery process to ensure a comprehensive insurance claim can be submitted and valuable information captured to strengthen crisis and business continuity planning for the future.
“Businesses with disaster recovery plans in place were much better positioned than those without a plan in the first week of recovery,” says Bruce Loader, an Assurance partner at Ernst & Young in Christchurch. “But all business owners need to stop and take stock of the overall costs of the earthquake before finalising insurance claims. The costs of operational outages, IT interruptions and disruption to manufacturing and processing operations take time to quantify.”
“Give your business a thorough check up and ask for expert help if necessary,” says Loader. “You can’t always see the damage right away. Record anything you consider may be relevant to quantifying the financial impact on the business and remember Business Interruption insurance policies cover only the interruption to the business as a result of damage, not the impact of wide area damage and the general economic effect of the earthquake.”
“It is important to identify lost revenues and capture extra costs arising after the earthquake damage,” says Loader. “Keep a record, with a full description of lost revenues and additional costs. These items can be reviewed later by professional advisers to advise on eligibility for inclusion in Material Damage or Business Interruption claims.”
“If cash flow is significantly affected, businesses should contact their bank and seek extension of existing facilities and deferment of loan repayments where possible” continues Loader.
“There’s also tax to consider,” says Loader. “Income tax issues will arise from insurance claim proceeds. And don’t forget the GST rate change is just 2 weeks away on 1 October 2010. Required business systems and GST process changes will need to be ready by then.”
For businesses, generally GST applies when an insurance payment is received for a business loss. GST is accounted for at the rate which applies when they receive the payment. There is a special transitional rule in the latest tax legislation passed by Parliament which ensures insurance claims accepted by an insurance company and paid out before 1 October 2010 will be taxed at the 12.5% rate (subject to certain requirements) even though the insured may not physically receive the payment until after 1 October 2010.
For private households and financial institutions, there is a potential for a mismatch between how much GST the insurance company can claim on a cash settlement and the GST incurred by the insured on repairs and replacement costs.
For example, a household could pay 12.5% on repair costs directly incurred before 1 October 2010 and if their insurance company makes a cash settlement to them after 1 October 2010 then the insurance company could be entitled to claim GST back at a 15% rate. The mismatch can occur the other way around as well but should not occur where the insurance company contracts directly with the repairers.
For those with statutory financial reporting requirements, reporting of the estimated material financial impacts of earthquake will need to be considered, including subsequent events disclosures, and accounting for loss of profits claims, and impaired and replacement assets.
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This media release was produced with input from Bruce Loader, Assurance partner with Ernst & Young in Christchurch, and Peter Faire of Fawcett Faire
Disclaimer: This communication provides general information only. Ernst & Young disclaims all responsibility and liability (including without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk.
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