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Hi, can I get help on this:
IAS 10 – subsequent events:Situation:
Inventory stock count was rescheduled to a week post year end due to flooding. During stock count, the company’s audit team found a large quantity of inventory was damaged ($20,000). The damaged items were included in the inventory balance in the financial statements. Pursuant to the company’s insurance policy, they will receive $15,000 insurance to cover damage. It has been confirmed via email but the payment has not yet been received. Insurance claim was not reflected in financial statements.My answer would be:
Inventory damage is an adjusting event. So, the inventory must be written off from the balance sheet of prior financial statements.
DR Inventory write off 20,000
CR Inventory 20,000Insurance is a non-adjusting event. It will not be reflected into the balance sheet of prior financial statements. However, it must be disclosed in the notes because it is probable for the company to receive it in the future.
Reason:
• This is because I think insurance confirmation arrives after year end and it does not provide a pre-existing condition (similar to lawsuit that arose after year end). That’s why we cannot record it in financial statements.
• In regards to how much we should disclose, I saw somewhere we have to record the insurance at $20,000 instead of $15,000 (reflecting the inventory damage). Once it’s received in the future (confirmed), then we would record the insurance as an asset at $15,000 with $5,000 loss in insurance proceeds. (I am so confused if I understand correctly what I read)More question:
• But could it be possible that the answer is insurance is an adjusting event too. They need to record a receivable for the insurance claim for $15,000 in the financial statements. This is because the amount can be reliably estimated as this is specified in the company’s insurance policy and has been confirmed by the insurance provider.
• The journal entry would then be:
DR Account receivable 15,000
CR Insurance compensation 15,000Thank you
I recommend that you ask such technical questions on the FR forum (or my AA forum) as they may not be answered by your fellow students.
I suggest there are two good arguments for adjusting for the insurance proceeds:
1) I agree with your Dr/Cr Inventory. But ask yourself, does the recognition of $20k loss in SPoL “present fairly”? If you know the actual loss is only going to be $5k, the $15k would need to be recognised (i.e. adjusted for), not “merely” disclosed.
2) Even though the claim is not made until after the y/e (obviously), the inventory was insured at the y/e. The making of the claim provides additional evidence that as at the reporting date the cost to the company of the lost inventory will not be $20k, but only $5k.
To elaborate on 2).
Since COVID, accounting for insurance proceeds/compensation has become very topical, and many of the big firms have published guidance in this area. For example:
“Lost profits, by themselves, do not give rise to a provision. 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. Following that guidance, a company recognises the compensation for business interruption as a receivable when it has an UNCONDITIONAL RIGHT to receive the compensation.
“A company would have an unconditional contractual right to receive compensation if:
– 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.”Hello, thank you for taking the time to reply and explain:)
Summary of what I think you’re explaining:
1. The inventory loss would be adjusted and recorded at $5,000 because it is probable to receive $15,000 insurance in the future. So, the actual loss suffered is only $5,000.
(“The making of the claim provides additional evidence that as at the reporting date, the cost to the company of the lost inventory is only $5,000”)
DR Inventory write off $5,000
CR Inventory $5,0002. The insurance would be an adjusting event on the basis that the company has an “unconditional right” to receive the compensation because
– they have an insurance contract (“Pursuant to the company’s insurance policy…” stated in the question)
– the loss event creates a right for the company to receive the insurance (“Pursuant to the company’s insurance policy, they will receive…”)So, the company was insured at the time of the loss (at the y/e).
DR Account receivable $15,000
CR Insurance compensation $15,000My question:
In regards to point number 1:I understand that we should only record the “actual loss” suffered, which is $5,000 in the financial statement (?). But the inventory damaged was $20,000. So, wouldn’t recording only $5,000 would make our inventory overstated?
Thank you
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