Involuntary Conversion

November 2017 | Posted in Audit, Whitley Penn
Audit, Whitley Penn
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The Gulf Coast region has been significantly impacted by severe weather and disasters recently. These recent events impact businesses in various ways, one of which is the involuntary conversion of a nonmonetary asset like a truck, machinery, building, etc. into a monetary asset such as insurance proceeds resulting in a gain or loss.  The accounting for these events varies on when the amount of the proceeds will be determined and whether a gain or loss from the involuntary conversion occurred.

When insurance proceeds do not cover the full amount of the lost property it creates a loss. These losses are recognized in accordance with Accounting Standards Codification (ASC) 450-20.  The guidance requires that the loss be accrued when the amount of the loss can be reasonably estimated.  For example, if your company truck (carried on the books for $8,000) was totaled by a flood, and the insurance company accepts the claim offering $6,000 for settlement to be paid in the subsequent period; your company would write-off the truck for the full $8,000, record a receivable for $6,000, and recognize a loss of $2,000 in the accounting period the loss occurred.

In other cases where the insurance proceeds will exceed the carrying value of the lost asset, any gain is recognized in accordance with the guidance in ASC 450-30. Gains are only recognized once realizable, which is generally considered when cash is received.  If the cash to be received is known, a recovery equal to the amount of the lost property is recorded in the period the damage occurred.  The gain would then be recorded in the period the cash is actually received.  Assuming the same fact pattern as above except the insurance company will settle for $12,000; your company would write-off the truck from the books and record a receivable for $8,000 during this period.  Further, your company would then recognize a gain of $4,000 in the following accounting period.

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