Several pieces of guidance govern the presentation and disclosure of insurance recoveries:
- ASC 610-30, Gains and losses on involuntary conversions
- ASC 410-30, Environmental Obligations
- ASC 220-30, Income Statement – Business Interruption Insurance
provides guidance on involuntary conversions of nonmonetary assets (such as property or equipment) to monetary assets (such as insurance proceeds). It requires recognition of a gain or loss on this type of involuntary conversion, measured as the difference between the carrying amount of the nonmonetary asset and the amount of monetary assets received. As such, insurance recoveries are recorded in the same financial statement line as the related loss up to the amount of loss. If insurance proceeds are in excess of the related loss, which may occur with replacement cost insurance, the gain is typically included in other income. In a two-step income statement, it is often shown as nonoperating income.
Most insurance proceeds are typically not refundable and do not require any further action from the insured; therefore, full or partial deferral of recognition of the proceeds should be rare.
Example FSP 23-1 illustrates the recognition, measurement, and disclosure of a loss of equipment with a potential insurance recovery.
EXAMPLE FSP 23-1
Considerations for casualty loss with a potential insurance recovery
On June 1, 20X1, FSP Corp's equipment is heavily damaged while being transported from its manufacturing facility to its retail facility. Due to the nature of the damage, FSP Corp determines that there is a total loss. The equipment had a net book value of $7 million and an estimated replacement value of $6 million as of the date of loss. FSP Corp files a property and casualty claim with its insurer for recovery of $6 million. Based on its discussions with the insurer and review of the policy by in-house experts, FSP Corp concludes that it has a covered loss under the policy and that it is probable the insurer will settle the claim for at least $5 million. However, the insurer has communicated to FSP Corp that the amount of final settlement is subject to verification of the identity of the equipment damaged and the receipt of additional market data regarding its value.
How should FSP Corp recognize, measure, and disclose the loss of the equipment and the potential insurance recovery?
FSP Corp should write off the net book value of the equipment of $7 million and recognize an asset of $5 million for the probable recovery of its loss (a loss recovery asset on the balance sheet), resulting in a net initial loss of $2 million. FSP Corp should recognize any remaining recovery (i.e., any excess over $5 million) when recovery of an additional amount is probable (e.g., when the identity of the damaged equipment has been established and additional market data confirm its value).
FSP Corp should record the insurance recovery in the same financial statement line item in the income statement as the related loss was recorded. To the extent the loss is material, FSP Corp should disclose the nature of the events leading to the loss and additional amounts that are expected to be recovered.
Insurance recoveries of environmental obligations
and ASC 410-30-35-9
address insurance recoveries related to environmental obligations. The guidance indicates that an asset related to an insurance recovery should be recognized only when realization of the claim underlying the recovery is probable. It further stipulates that there is a rebuttable presumption that realization of the claim is not probable if the claim is the subject of litigation.
Probable recoveries should be reflected separately as an asset in the balance sheet and not netted against the remediation liability, consistent with ASC 210-20
, Balance Sheet—Offsetting
. ASC 410-30-45-2
states that it would be rare, if ever, that the facts and circumstances surrounding environmental remediation liabilities and related receivables and potential recoveries would meet the criteria of ASC 210-20
. The financial statements should also include a discussion of material uncertainties that may affect the measurement and realization of the asset and liability.
Business interruption insurance
provides guidance related to the presentation and disclosure of business interruption insurance proceeds. Business interruption insurance is insurance that a reporting entity might purchase to cover losses caused by the loss of use of property or equipment. This insurance typically provides for reimbursement of qualifying costs while a reporting entity rebuilds, repairs, or replaces the damaged property. The guidance allows a reporting entity to determine the classification of recoveries as long as the classification does not conflict with existing US GAAP.
An entity may choose how to classify business interruption insurance recoveries in the statement of operations, as long as that classification is not contrary to existing generally accepted accounting principles (GAAP).
also requires a reporting entity to disclose certain information in the footnotes for period(s) in which recoveries are recognized. These include:
The nature of the event that caused the business interruption losses
- The aggregate amount of business interruption insurance recoveries recognized each period and the income statement line item in which the recoveries were included