Business Consequences of Natural Disasters - Milley Company - Case Study Example

Business Research Report” This is a report on the degree and magnitude of damage in Brisbane and in particular the Miller Book publisher as a result of the “Floods in Queensland”. The report will entail a discussion on the recognition, the measurement and the disclosure concerns for destruction of inventory items, contracting for the supply of books to meet the deficiency, accounts receivables’ collectability, replacement for the destroyed property, equipment and plant, assistance from the government and the expenses incurred on cleaning up (in May, 2011). The report will also contain recommendations on all of the outlined items. Table of contents Item Page Nos. Executive summary: 3 Introduction: 4 The recognition, the measurement and the disclosure requirements for: 5 -inventory items that are damaged or destroyed 6 -“Collectability of accounts receivable” 7 -A “contract to supply books that Milley cannot fulfill” 7 -“Items of property, plant and equipment destroyed or damaged that need to be replaced” 7 -“Cleaning up costs that will be incurred in May 2011” 8 -Government assistance to be received 8 Conclusions: 10 Recommendations: 11 List of references: 12 Appendix: 13 Executive summary Milley Company is a prominent book publisher located in the city of Brisbane. Milley will provide very high quality books for all genres and for all academic level and backgrounds. Milley will also provide individual services and also services to other businesses (academic institutions, public libraries and other large organizations) with high emphasis on quality services and consistent response to details. Milley Company has been in operation for some years and commands a considerable market share in Brisbane and the large Australia. The continuance of operation is very crucial to Milley’s continued success and the future profitability of the company. The warehouse offers quality books unsurpassed by any of the competitors. The major aim of this business research report is to investigate on the extent of the floods in Brisbane and the magnitude of damages in Miller book publisher. Some clarification will also be made on the reporting standards of the damages in the periodic final accounts of the company. This report recommends that Miller book publisher develop company policies that meets the requirement for Introduction There has been an enormous damage and destruction of the offices of Milley book publisher and its warehouse during the floods and storms that occurred recently in Brisbane. The recent “flood in Brisbane” has never been experienced since the year 1974. Milley book publisher did encounter some “low-level flooding” however it left the company with quite some huge loss due to the nature of the business of the company. Since then the company has not been in operation but is set for clean up in May 2011 after which it will be fully in operation. From the experience of 1974, there has not been erection of buildings on areas that are low-lying and hence most buildings in Brisbane have been left intact even after the devastating floods. In Brisbane, the Flood waters withdrew on the 14th day of the month and many volunteers came to render their support in cleaning up the mess in the city. The overall loss is in terms of billions. For Miller book publisher it has incurred some millions of cash. According to some reports it is very rare to witness another flood in Brisbane. The Board of Directors (BOD) of Milley Company requests some explanation regarding the way the damage and destruction from the floods and storms that occurred recently should then be reported in Milley’s annual accounts of the financial year 2010/2011 (Brigham and Ehrhardt, 2010). In specific the BOD needs to understand the recognition, the measurement and the disclosure requirements for the following items: -inventory items that are damaged or destroyed -“Collectability of accounts receivable” -a “contract to supply books that Milley cannot fulfill” -“items of property, plant and equipment destroyed or damaged that need to be replaced” -“Cleaning up costs that will be incurred in May 2011” -Government assistance to be received The business research and report is also undertaken on the “floods in Queensland” since the meeting will be a “national board meeting” and a number of board members are completely not conscious of the level and magnitude of the damage and destruction in Brisbane and therefore this report will shed some light on the extent of damage caused by the recent floods and storms in Brisbane. This report will also make recommendations with regard to the recognition, the measurement and the disclosure requirements of all the items listed above. This report will focus on the reporting standards according to the AASB. Presently, there is no official company’s policy regarding the reporting standards of the mentioned items. The recognition, the measurement and the disclosure requirements In the event of a natural disaster the Milley Company will have to be attentive to the financial statements’ preparations and the related reporting implications due to the recent floods and storms as it prepares its financial statements as per the accounting standards. Despite the fact that both the recognition and the disclosure suggest crucial information to all the users of the financial statements, the disclosure is not a substitute for recognition or its alternative. Disclosure of such information is provided by; notes on the bottom of the financial statements, supplementary information, and by other ways of “financial reporting “The aspect of recognition arise when some internal or external events to the company show the possibility of existence of a liability. This probability must not be remote and the uncertainty with respect to the amounts must also be low. That is, recognition will occur only after resolving the existence and the uncertainty of measurement. Usually, there is time lag between the period of reporting and when financial statements are authorized. In the event of a natural disaster any time after the periodic reporting and before the authorization, the event is identified as “non adjusting” and the company reveal for each and every material categorized as “non adjusting event”, nature of event and the approximation of its effects (financial) , and a declaration that the estimate can never be made. Contrary, in the event of a natural disaster which existed even before the periodic reporting, “adjusting event” it is a requirement by the Accounting Standards (AASB) that the total amount acknowledged in the annual accounts reflected the “adjusting event” (Kazenski, P.M. 2000). The recognition, the measurement and the disclosure requirements for inventory items that are damaged or destroyed Items of inventory should be measured at the “lower of cost” and the “net realizable value”. Inventory items which have been destroyed or damaged in the event of a natural disaster must be appraised and valued. The usual practice of reporting inventories according to their “net realizable value” are in line with the concept that assets should not be maintained for amounts that are in excess of the expected realization from the sale of those assets. The amount written down for inventories to the net-realizable-value and all the inventory losses are always “recognized as an expense” within the financial year the loss or the write down occurred. The recognition, the measurement and the disclosure necessities for “Collectability of accounts receivable” During the period of reporting it is required that there be an assessment of whether the “collectability of receivables” has been interfered with in the event of a natural disaster and setting out the various requirements so as to make a determination of the total of any “impairment loss” The requirements for recognition, the measurement and the disclosure for a “contract to supply books that Milley cannot fulfill” Due to the disruption of the operation of the company it is evident that it cannot meet all its supply obligations and thus it is pretty important for Milley to contract another book publisher to supply the books that the company cannot fulfill in order to protect its goodwill. This contract is necessary as the inevitable expenditure of having to honor the obligations under its contracts far much exceeds the benefits anticipated to accrue from it (Brigham and Ehrhardt, 2010). Supply contracts will basically set out the rights and the obligations for both parties in the contract. In the event of a natural disaster it is a requirement that the company make a recognition of the liability measurement at the “lower of the cost” of discharging it and penalties or the compensation that arise from the failure to accomplish it The requirement for the recognition, the measurement and the disclosure of “items of property, plant and equipment destroyed or damaged that need to be replaced” Some property, plant and equipment of the company were completely destroyed by the floods and they need immediate replacement as they are crucial to the smooth flow of work in the business. However, a determination should be made for the amount that is recoverable from the write-down. The requirement for the recognition, the measurement and the disclosure of “Cleaning up costs that will be incurred in May 2011” The floods and the storms left the company messed up and it needs to be cleaned up later in May 2011. The company will incur substantial costs during this exercise. Note that these costs are directly attributable to the process of bringing the company to the situation conducive for the normal operations of the company. In the event of a natural disaster the management of Milley Company is incapable of operating some property, the plant and the equipment as they had earlier planned. This has necessitated the restoration, purchasing or construction of these items. The expenses of the relocation or the reorganization of parts or all the operations of the company are normally not incorporated in the “carrying amount” of the company. The requirement for the recognition, the measurement and the disclosure of Government assistance to be received It is a requirement that any compensation from any third party which may be from the government or an insurance company, the indemnity, under the conditions and terms in the insurance contract. Any property, equipment and plant that were damaged or destroyed be incorporated in the profit and loss accounts of the company when this compensation is received (Khan and Jain, 2007). The assistance from the government for the damages caused to Milley Company in the event of the natural disaster will not be recognized in the final financial accounts of Milley Company till there is considerable guarantee that the company will follow the terms and conditions that attaches to that assistance and the surety that the grant will be receipted. Compensation from the “Queensland state government” will become receivable when income realization is “nearly certain”. It is consequently, likely that the “recognition of the payment from the Queensland state government” will happen later in the subsequent periodic reporting than the recognition of impairment (Brigham and Ehrhardt, 2010). Conclusion “Early Warning Systems”(EWS) can be made use of in order to avert floods and storms disaster in Brisbane in the future so as to prevent any possible economic and the financial crisis that result from the consequences of natural disasters to the business. The role of the EWS is mainly to make an identification of the indicators that provides just in time prediction of any looming disaster and thus cushion the company from being vulnerable to disastrous effects (Davis and Karim, 2008). The latest floods and storms in Brisbane was clearly destructive and in particular the Milley book publisher incurred heavy financial losses such that the only option left for the company is to contract another company to supply the books which the company cannot fulfill. The “recognition of the compensation from the government” will happen in later periodic reporting than recognition of impairment. Recommendations It is thereby recommended that Milley Book Publisher develops and or rely on early warning systems (EWS) so as to respond in good time and minimize the consequences of natural disasters like floods and storms in the event that they materialize. It is also recommended that the company takes the clean up exercise in May 2011(as soon as possible) to ensure that the company has resumed its operations in the earliest time possible as it has several obligations to meet and also has the goodwill to protect. Milley company should replace the destroyed and damaged “property, plant and equipment” (PPE) as some has been completely damaged to the extent they can no longer be economical for the company to use them (Khan and Jain, 2007). However some assets are in a condition that can be repaired and used for sometime within the business before they are written down. It is recommended in this report that an assessment of whether the “collectability of receivables” has been interfered with in the event of the natural disaster is done and the setting out of the various requirements so as to make a determination of the total of any “impairment loss” The report recommends that items of inventory are measured at the “lower of cost” and the “net realizable value”. Inventory items which have been destroyed or damaged in the event of a natural disaster must be appraised and valued. References Brigham, E.F and Ehrhardt, M.C. 2010. Financial Management Theory and Practice. Farmington: Cengage Learning. Davis, E.P. and Karim, D. 2008. Comparing early warning systems for banking crises, Journal of Financial Stability, 4(2):89-120. Kazenski, P.M. 2000. Recognition, Measurement, and Disclosure of Environmental Liabilities. Manoa: Hawaii Publisher. Khan and Jain. 2007. Financial Management. New Delhi: Tata McGraw-Hill Publishing Company Ltd. Appendix AASB – Accepted accounting Standards Board EWS- Early Warning systems Determination of whether the “natural disaster event” is either an “adjusting” or “non-adjusting” event is usually straight forward. PPE – “Property, Plant and Equipment” Read More