United States

Audit and Enterprise Risk Services


Financial Reporting Implications of the Recent Natural Disaster in Japan


Financial Reporting Alert 11-3

March 31, 2011

Background and Deloitte Practice Guide on Disasters

On March 11, 2011, an earthquake centered off of the northeastern coast of Japan caused a powerful tsunami, resulting in the tragic loss of many lives. This natural disaster also caused wide-spread damage to and destruction of property as well as disruption of power supplies. In addition, damage to a nuclear power plant has resulted in the release of radioactive material. The event has disrupted business activity to varying degrees in regions of Japan and parts of the rest of the world.

The purpose of this alert (and accompanying practice guide) is to highlight some of the financial reporting implications of the natural disaster for affected entities reporting under U.S. GAAP. Such entities may include those with principal operations in the affected area of Japan or those with ancillary operations or interests in the region. Entities may also be affected as a result of relationships with major suppliers physically located in the affected region. In addition, insurance entities may experience significant losses as a result of the natural disaster.

As interim and annual reporting periods are approaching, we expect that entities1 will need to address several accounting and disclosure issues precipitated by the natural disaster. Such issues might include:

·       Accounting for impairments of assets such as goodwill, property, plant and equipment, inventory, receivables, loans, or other investments (including evaluating insurance recoveries or third-party guarantees).

·       Accounting for losses from environmental damage and cleanup or other legal obligations caused by the natural disasters.

·       Accounting for costs related to exit and disposal activities.

·       Income statement presentation of losses from the natural disaster (e.g., whether extraordinary-item treatment is appropriate).

·       Disclosing the impact (and related uncertainties) of the natural disaster on the operations of the entity and its financial statements.

·       Assessing the internal control over financial reporting.

To help entities begin this process, the accompanying practice guide identifies potential issues and, if available, applicable authoritative guidance. The financial reporting implications discussed in this practice guide are not intended to be all-inclusive; rather, they are a starting point for thinking about the issues that might arise.

SEC Guidance

We do not currently expect that the SEC staff will provide broad-based filing or other relief or formal guidance related to Japan’s natural disaster.2 However, we understand that the SEC staff is monitoring the situation closely.3 Entities are encouraged to consult with their auditors and, if necessary, the SEC staff, if they believe that specific facts and circumstances warrant filing or other relief or additional guidance. If such relief or guidance is provided by the SEC staff, we will update this financial reporting alert.


Deloitte clients with questions about this alert (or practice guide) should contact their engagement partner. Deloitte engagement teams should direct questions to an appropriate subject-matter resource in Deloitte’s AERS Professional Practice Network.


1   This would include Japanese domiciled registrants that file Form 20-F with the SEC.

2   We also do not expect formal guidance from the FASB.

3   For example, the SEC issued broad-based filing and other relief and additional guidance (e.g., about auditor independence) in connection with Hurricane Katrina in an exemptive order. The SEC staff informally indicated it would consider actions taken by Japanese regulatory bodies in determining whether to issue filing relief (e.g., the Tokyo Stock Exchange has issued guidance on its Web site “concerning handling of the financial announcement, etc. in consideration of the earthquake off the Pacific coast of the Tohoku (North East) region”).