© 2020 Copyright owned by one or more of the KPMG International entities. 4.8 Income Statement Classification of Loss Recoveries and Gain Contingencies 74 4.9 Statement of Cash Flows Classification of Insurance Proceeds 75 4.10 Subsequent-Event Considerations 75 Appendix A — Differences Between U.S. GAAP and IFRS Standards 77 … Now I would like to understand the accounting treatment. I am throwing a sample question here. If the gain is recorded prior to cash receipt, the offsetting debit to the gain is a receivable for expected insurance recoveries. The accounting for insurance proceeds related to losses triggered by the COVID-19 outbreak depends on the nature and timing of the insured event. A gain would be recognized in the subsequent year if the insurance proceeds for the roof replacement claim were then approved and received. Under IFRS ® Standards, the accounting for insurance proceeds depends on whether a company recognises a provision for the insured event. for business interruption or third party claims, including penalties for non-performance, late delivery or cancellations. These funds may be . When payment is sent to your account, DR the “Bank” account and CR the “Insurance Claim”, then any difference between the asset value or compensation received could either be “gain or loss” which is posted to the income statement. Any other proceeds from disposing of the inventory items will also be debited to Cash. Recognise a reimbursement for a provision as a separate asset only when it is virtually certain that the company will receive it. We also look at the prospect of … Accounting & Financial Reporting for Insurance Recoveries . For many companies, accounting for insurance proceeds will be a new area. The most reasonable approach to recording these proceeds is to wait until they have been received by the company. Reimbursements © 2020 KPMG IFRG Limited, a UK company, limited by guarantee. IFRS 17 replaces IFRS 4, which currently permits a wide variety of practices. 9 [IAS 37.53]. [Insights 3.12.198.10]. It may be necessary to disclose in the financial statement footnotes the nature of the events resulting in insurance proceeds, the amount of the proceeds, and the income statement line item in which the resulting gain is recorded. A company would have an unconditional contractual right to receive compensation if: The compensation receivable would be measured based on the amount and timing of the expected cash flows discounted at the rate that reflects the credit risk of the insurer. IFRS 17 Insurance Contracts—the accounting model in one page Profit or loss Modifications for contracts with a ‘variable fee’ Other comprehensive income (optional) Insurance finance expenses +/– Changes in discount rates1 Balance sheet + + Insurance contract liability Notes P6 Accounting for insurance proceeds for natural disaster relief P7 Comments sought on exposure drafts In this month’s newsletter, we look at lessons learned from the Centro case and questions directors should be asking as a result. [IAS 16.65â66, Insights 3.12.195.15 and 198.10], References to âInsightsâ mean our publication Insights into IFRS. The process is split into three stages as follows: Write off the damaged inventory to the impairment of inventory account. Insurance--it's one of those things you're only happy about when you really need it, but it sure does come in handy when you really need it. Insurance Claim Proceeds. An alternative is to record the gain as soon as the payment is probable and the amount of the payment can be determined; however, this constitutes a form of accrued revenue, and so is discouraged unless there is a high degree of certainty regarding the payment. A gain from insurance proceeds should be recorded in a separate account if the amount is material, thereby clearly labeling the gain as being non-operational in nature. Following that guidance, a company recognises the compensation for business interruption as a receivable when it has an unconditional right to receive the compensation. Accounting for Insurance Proceeds Insurance proceeds require some specific accounting procedures. Click anywhere on the bar, to resend verification email. In short, this course shows how to determine which risks require insurance and which types of insurance to buy. Financial statement disclosures The money received from an insurance company for a claim involving a loss on inventory stock is debited to Cash. Since the last time you logged in our privacy statement has been updated. IASB issues amendments to IAS 16 regarding proceeds before intended use . requirements of IFRS 17, Insurance Contracts (IFRS 17), as issued by the International Accounting Standards Board (IASB) in May 2017, as well as the new disclosures introduced or modified by IFRS 9, Financial Instruments (IFRS 9), through consequential amendments to IFRS 7, Financial Instruments: Disclosures (IFRS 7). For example, if an insurance company pays for … Content Loss. When a business suffers a loss that is covered by an insurance policy, it recognizes a gain in the amount of the insurance proceeds received. The amount recognised as a reimbursement right is limited to the amount of the related provision. You will not receive KPMG subscription messages until you agree to the new policy. The exact accounting treatment of insurance proceeds depends on the nature of the policy and when payments are made. The fixed asset must be de-recognized from the statement of financial position and a loss must … 1 Insurance contracts are in the scope of IFRS 4 unless otherwise specified. Insurance--it's one of those things you're only happy about when you really need it, but it sure does come in handy when you really need it. KPMG refers to the global organization or to one or more of the member firms of KPMG International Limited (âKPMG Internationalâ), each of which is a separate legal entity. (Unlike at the time of the Christchurch earthquakes, there are no specific rules to defer depreciation recovery.) Gain on proceeds $0. • Compensation for loss of profits or trading stock. determines the appropriate accounting treatment for the major issues that frequently surface from these ... the accounting for insurance proceeds expected to be received is complex and requires an ... contingencies related to the insurance claim may be resolved, subsequent to the balance-sheet date. Review insurance contract terms and, involving legal advisers where necessary, determine eligibility to claim under insurance contracts for losses caused by the COVID-19 outbreak. To determine this, companies need to consider the nature and timing of the insured event. for lost profits caused by COVID-19. The accounting treatment would differ between specific insurance policies, depending on its terms and conditions Member firms of the KPMG network of independent firms are affiliated with KPMG International. Insurance Claims Proviso (GP: Insurance Claims) Any insurance reimbursement to an agency may be used to offset expenses related to the claim. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. Assume that during 2017 year end there was a fire accident and we were expecting insurance claim in 2018 around USD 11 Million. In May 2017, the IASB finished its long-standing project to develop an accounting standard on insurance contracts and published IFRS 17, ‘Insurance Contracts’. Accounting treatment for lost motor vehicle with insurance claim by: Anonymous If a motor vehicle of a company with cost of 2,000,000 Naira (Nigerian currency) and accumulated depreciation of 800,000 had an accident insurance claim of 1,500,000 for the lost motor vehicle, what will be the accounting entry? Insurance proceeds should be reflected on your financial statements. Insurance proceeds to settle a provision are accounted for as reimbursements under IAS 37 Provisions, Contingent Liabilities and Contingent Assets and are recognised as a separate asset (with related income) when recovery is virtually certain. retained, expended, and carried forward. Although IAS 16 does not define the point at which compensation becomes Accounting for Interest Income Associated With the Purchase of Callable Debt Securities 41 Statutory Developments (NAIC) 42 ... address IFRS 9 adoption for entities that are subject to the insurance standard. Some companies may have insurance cover for losses triggered by the COVID-19 coronavirus outbreak â e.g. This is especially the case for costly repairs and the reimbursement for these repairs or even replacements. It also notes the more common insurance policy terms and conditions, the types of insurance most applicable to businesses, and how to manage and account for insurance. 4.8 Income Statement Classification of Loss Recoveries and Gain Contingencies 74 4.9 Statement of Cash Flows Classification of Insurance Proceeds 75 4.10 Subsequent-Event Considerations 75 Appendix A — Differences Between U.S. GAAP and IFRS Standards 77 … it has an insurance contract under which it can make a claim for compensation; and, the loss event that creates a right for the company to assert a claim at the reporting date has occurred and the claim is not disputed by the insurer. Receive the cash from the insurance company. The new standard is effective from 1 January 2021 with an option to early adopt, only if the company also applies IFRS 9 financial instruments and IFRS 15 revenue from contracts with customers. Get the latest KPMG thought leadership directly to your individual personalized dashboard. Accounting treatment for lost or stolen tangible fixed assets such as motor vehicles is similar to the accounting for disposal of such assets without any sale proceeds. When the claim is agreed, set up an accounts receivable due from the insurance company. Please note that your account has not been verified - unverified account will be deleted 48 hours after initial registration. Therefore, compensation for business interruption is not a reimbursement right under IAS 37 and should be accounted for by analogy to guidance on compensation for impairment under IAS 16 Property, Plant and Equipment. We comment on seven IFRS Interpretations Committee tentative agenda decisions . 20 Aug 2019. Dr Accumulated Depreciation 800,000 9 Should this be posted with insurance costs in overheads, … We want to make sure you're kept up to date. The IFRS exempts an insurer temporarily (until completion of Phase II of the Insurance Project) from some requirements of other IFRSs, including the requirement to consider IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in selecting accounting policies for insurance contracts. As a result, the accounting for insurance proceeds expected to be received is complex and requires an entity to make judgments and estimates related to insurance recoveries that may be material to the financial statements of the current and subsequent accounting periods. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à -vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. As a result of the COVID-19 outbreak, some companies may struggle to fulfil their legal or contractual obligations and may incur penalties that give rise to a provision. You will not continue to receive KPMG subscriptions until you accept the changes. For more detail about our structure please visit https://home.kpmg/governance. Standard IAS 16 prescribes the accounting treatment for property, plant and equipment and therefore it is one of the most important and commonly applied standards.. All rights reserved. In addition, accounting for insurance proceeds may impact both the current (recording the known incurred loss) and subsequent accounting period (the recording of the insurance proceeds). A gain from insurance proceeds should be recorded in a separate account if the amount is material, thereby clearly labeling the gain as being non-operational in nature. If the gain is recorded prior to cash receipt, the offsetting debit to the gain is a receivable for expected insurance recoveries. Accounting treatment is correct. By doing so, there is no risk of recording a gain related to a payment that is never received. 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