When faced with property damage and other losses that an entity has insured itself against, questions often arise with respect to the accounting for that property damage and any related insurance recoveries. Specifically, where a loss is sustained in one fiscal period, but the related insurance recovery is not received until the next fiscal period, questions arise about the timing and amount of potential insurance recoveries to be recorded. Because FASB Accounting Standards Codification (ASC) 450, Contingencies, does not allow the recognition of gain contingencies, the accounting for insurance recoveries can be more complex than you might expect.
A potential insurance recovery should be evaluated and accounted for separately from the related loss and should not in any way affect the recorded amount of the loss. An asset relating to an insurance recovery should be recognized only when realization of the claim is deemed probable, and only to the extent of the related loss recognized in the financial statements. Any amount expected to be recovered in excess of the recognized loss, which will result in a gain, should not be recognized until any contingencies relating to the insurance claim have been resolved. In other words, the recovery of a loss is treated differently than the recognition of a gain, and an insurance recovery might result in both the recovery of a loss, which can be recognized when probable, and a contingent gain, which cannot be recognized until realized.
The recovery of a loss generally would be probable if there is a legally enforceable contract that stipulates the terms of the insurance coverage and the terms are not in dispute nor is there any reason to believe they would be disputed. If the claim is the subject of litigation, a rebuttable presumption exists that realization is not probable. For certain claims, it may be necessary to obtain written confirmation from legal counsel that the claim is actually covered by the insurance policy.
The expected gain portion can be recognized prior to receipt of cash when it is no longer contingent. This might occur when the insurance company acknowledges that a specified payment is due, at which time the recovery would be represented by a valid receivable, rather than a contingent asset.
It also is important to evaluate whether any losses related to property damage have been properly recorded. The entity should not automatically record the property’s full book value as a loss, or an amount determined by an insurance adjustor. The loss should take salvage or resale value into consideration, and should follow the guidance in ASC 360, Property, Plant, and Equipment, for computing impairment losses. A gain or loss should be recognized when a nonmonetary asset (such as property or equipment) is involuntarily converted to monetary assets (such as insurance proceeds), even though the entity reinvests or is obligated to reinvest the monetary assets to replace the nonmonetary assets.
In situations where damaged or impaired property is subject to a nonrecourse mortgage and the entity intends to default on the mortgage and relinquish the property to the lender, the property loss should be computed in accordance with ASC 360 without regard to any potential gain on extinguishment of debt. Additionally, any gain on extinguishment of the mortgage should not be recorded until the property is actually turned over to the lender and the entity’s obligation is legally released, which might not occur until a subsequent accounting period.
The analysis of when to recognize insurance recoveries for business interruption insurance could be more complex because the loss of expected revenue is not deemed to be "a loss recognized in the financial statements.” Accordingly, the entire amount of any potential recovery would be evaluated to determine whether it is a gain contingency or a valid receivable. On the other hand, an accrual of salaries paid to idle workers could meet that definition. The ultimate recovery under a business interruption policy is highly judgmental and typically subject to substantial negotiations between the insured and the insurance company. Accordingly, it may be difficult to conclude that any potential gain is not a gain contingency, meaning the gain should not be recognized until realized.