INSURANCE ACCOUNTING FOR POLICYHOLDER
| Dec 19, 2011
Hi Dear
our company has faced fire damage lately, please guide me about accounting entries of 1) impairment loss and 2)upon receiving the claim as a policyholder. I will be grateful
thanks
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Answers
Company: Consultant
Dear Alones......simply stated, on the date of the loss, you will need to remove the asset as you no longer have it. Simultaneously, you will need to set up a receivable from the insurance company. The difference between the carrying value of the asset and the insurance claim will be the impairment loss.
EXAMPLE:
The asset has carrying value of $1,000,000 and the insurance proceeds are expected to be $800,000. Hence, in this case you will record the following entry:
DEBIT Insurance company.....$800,000..................<-- Insurance claim amount
DEBIT Impairment loss............$200,000 ..................<-- Balancing figure
CREDIT Asset........................................$1,000,000.....<-- Carrying value of asset
The above is a very simplified example, in reality the things will be more complex as you will not know how much amount the insurance company will pay, etc. In such a situation you will need to make an estimate of the proceeds expected from the insurance company.
Please call me for free consultation and I can discuss the various other scenario's with you that are unique to your situation.
Company: Withheld
hello Sunil
thanks for your reply and guidance, I want to clarify about impairment loss here, as impairment is an estimation of future recoverable amount so I doubt about taking the difference as an impairment, shouldn't it be taken as a loss (written off) instead. Then the assets that has not written off would be tested for impairment and recorded accordingly.
secondly if claim > BV of asset, would it be booked as other income?
Thanks once again for reply
Best regards
Company: Consultant
Hello Alones,
As mentioned earlier, I had taken a very simple example to explain the concept of recording the losses, etc. I agree with what you, however, it is better to explain it with the detailed journal entries.
STEP 1:
When the asset is destroyed due to fire, you will need to write the carrying value off (let's assume that it is $700K). Let's assume that the you receive insurance proceeds of $800K for this asset. So you will record the following journal entry:
DEBIT Insurance company..................$800,000.........<-- Insurance claim amount
CREDIT Gain on the retiring the asset ..............$200,000 ..<-- Balancing figure
CREDIT Asset...................................................$700,000.....<-- Carrying value of asset
STEP 2:
Conduct an analysis to determine the impairment loss for the assets remaining within the asset group.
Please let me know if you need any additional clarifications on this issue.
Best regards,
Sunil
Company: Withheld
Thanks a lot Sunil , i will keep in touch with you on this issue
Company: Consultant
Alones, you are very welcome. I am glad that I could be of help to you.