Currently, many businesses and citizens are dealing with the natural disaster that has struck our territory. Considerable effort will be required to clear away the damage caused by the flood.

Entrepreneurs (accounting entities) will deal especially with the area of non-current assets or inventory that have been partially or completely damaged. Entities will expend funds to repair damaged assets or be forced to dispose of those assets because they cannot be used again. At the same time, it is assumed that the assets in question have been insured, i.e. the entities will seek reimbursement from their insurer based on an insurance policy.

In this article, we will summarize the issue from the accounting perspective and we will also focus slightly on the tax treatment of property damage in the accounting of an accounting entity.

The accounting entity identifies the items that were affected by the natural disaster and assesses which will be repaired (the assets are not completely damaged and therefore can be restored to their original condition within economic and technological possibilities) and which will be discarded because of total damage.

Damage to property

The concept of damage is defined in accounting and tax regulations. Accounting rules consider physical deterioration, that is, irreparable damage or destruction, of non-current intangible and tangible assets and inventories to be damage due to objective and subjective causes. The Income Tax Act has a similar definition, namely that damage means physical deterioration (damage or destruction) of property owned by the taxpayer, both for objective and subjective reasons, if the property is disposed of as a result of the damage.

In other words, we speak of damage where the taxpayer has no choice but to dispose of the damaged asset – it cannot be repaired, sold, etc.

An asset damaged by a natural disaster (let’s assume this to be a non-current asset) will be removed from the entity’s records. A damage committee should be appointed to evaluate the asset and decide on its disposal. An integral part of this decision is also the supporting evidence for the actual disposal of the asset, in particular the disposal report containing the individual elements.

Based on this decision, a two-step disposal will be made in the accounts:

1. the carrying amount of the asset as of the date of disposal shall be debited to (debit side) account 549 – Other operating costs and credited to (credit side) account 08x v Allowances for tangible non-current assets (or account 07x – Allowances for intangible non-current assets).
2. The cost of the asset will be derecognised by entering debit to account 08x – Non-current tangible assets (or account 07x – Non-current intangible assets) and credit to account 02x – Non-current tangible assets (or 01x – Non-current intangible assets).

In connection with damage due to natural disaster, the entity will deal with the payment of an insurance claim from an insurance company. As part of the tax assessment, the Income Tax Act states that the amount of the damage must be substantiated by the opinion of an insurance company, even if the taxpayer is not insured, or by the opinion of a forensic expert. After reporting a claim, the accounting entity submits the individual documents and awaits confirmation of the claim. Compensation for damage represents revenue for the entity to be accounted for at the time it is awarded, to the credit of account 648 – Other operating income and also to the debit of account 378 – Other receivables (or account 388 – Accrual accounts receivable).

In the context of tax assessment, the proceeds of the reimbursement from the insurance company (in account 648) will be fully taxable and at the same time, the value of the residual value recorded in costs (in account 549) will also be a fully taxable cost (after meeting the statutory conditions).

Repair of property

As the name implies, repair, as opposed to total damage, represents only partial damage to an asset. Accounting rules state that repair is the removal of the effects of partial physical wear and tear or damage in order to restore it to its previous condition. 

Assets that are repaired as a result of recorded damage from the elements will not be removed from the accounts, so there will be no change in the cost or residual value within the asset records. The individual repair costs incurred will be recorded in the accounting records and will be part of the entity’s costs in Account 511 – Repairs and Maintenance. In the case of a related insurance claim from an insurance company, the claim will be recorded in the same way as above for the loss, i.e. at the time of the award of compensation in account 648 – Other operating income and at the same time in account 378 – Other receivables (or account 388 – Accrual accounts receivable).

From the tax perspective, costs and revenues will be evaluated similarly to a natural disaster loss, i.e. the costs incurred will be tax-effective, provided the statutory conditions are met, and at the same time the proceeds from the benefit received from the insurance company will be part of the tax return (taxable income).

What to say to in conclusion...

Property damage due to natural disasters (windstorms, floods, fire) is unfortunately an integral part of business and civic life. No one wishes to be befallen, but nature is sometimes unpredictable and can do a lot of damage.

The accounting and tax field takes these cases into account and tries to accommodate accounting units (taxpayers) as much as possible in this respect, i.e. especially in the tax field to apply the incurred expenses as much as possible under the conditions set by law.

If you have any questions on the subject, please do not hesitate to contact us. We will be happy to help you find the optimal solution for you.