Contingent assets: Compensation from insurance companies
The definition and accounting treatment of contingent assets have been newly introduced in the most recent version of the Thai Financial Reporting Standards for Non-publicly Accountable Entities (TFRS for NPAEs) (Revised 2022). To determine the appropriate recording of compensation from insurance companies, adherence to the guidelines outlined in the TFRS for NPAEs is essential.
Keywords: Mazars, Thailand, TFRS, NPAEs, Contingent Asset, Insurance, Financial Reporting
A contingent asset is defined as an asset that may arise from a past event. Its existence is confirmed when one or more uncertain future events occur or fail to occur, events that are not entirely under the control of the entity (Paragraph 16.3 of the TFRS for NPAEs).
According to Paragraph 16.5 of the TFRS for NPAEs, entities must not recognize contingent assets. However, if there is a probability that economic benefits associated with the contingent asset will accrue to the entity, disclosure of the nature of contingent assets is required. Additionally, if feasible, entities should disclose the best estimate of the financial impact. Contingent assets must be realized if it is virtually certain that revenue will be received.
Example:
On 13 November 2023, a fire broke out in Company A’s office, causing significant damage to the office equipment, rendering it unusable. The office equipment had a book value of THB 570,000 (cost of THB 970,000, accumulated depreciation until 13 November of THB 400,000).
On 5 December 2023, the insurance company conducted a survey to assess the extent of the damage.
On 30 March 2024, Company A’s Board of Directors approved the issuance of its 31 December 2023 financial statements.
Scenario A:
On 10 December 2023, Company A received documentation confirming compensation of THB 1,100,000 from the insurance company. The document provided assurance that Company A would indeed receive compensation, with no conditions requiring Company A to return the funds.
On 22 December 2023, Company A received compensation from the insurance company totalling THB 1,100,000.
In this scenario, since the compensation income was received before the issuance of the financial statements, Company A must record the insurance compensation income in the financial statements for the year ended 31 December 2023.
Accounting entries:
1. 13 November 2023:
- Record loss from the fire.
- Dr. Loss from fire: THB 570,000
- Cr. Allowance for damage to office equipment: THB 570,000
2. 10 December 2023:
- Record compensation due from the insurance company.
- Dr. Receivable – Insurance company: THB 1,100,000
- Cr. Gain from reversal of loss from fire: THB 570,000
- Cr. Compensation income from insurance company: THB 530,000
- Write-off the book value of office equipment.
- Dr. Accumulated depreciation - office equipment: THB 400,000
- Dr. Allowance for damage to office equipment: THB 570,000
- Cr. Office equipment: THB 970,000
3. 22 December 2023:
- Record compensation received from the insurance company.
- Dr. Cash: THB 1,100,000
- Cr. Receivable – Insurance company: THB 1,100,000
Scenario B:
On 15 March 2024, Company A received documentation confirming compensation from the insurance company. The document provided assurance that Company A would indeed receive compensation, with no conditions requiring Company A to return the funds.
On 12 April 2024, Company A received compensation from the insurance company.
In this scenario, since the documentation confirming compensation was received before the issuance of the financial statements, Company A must record the compensation income and receivable from the insurance company in the financial statements for the year ended 31 December 2023.
Accounting entries: (same amounts and journals as per Scenario A)
1. 13 November 2023:
- Record loss from the fire.
2. 15 March 2024:
- Record compensation due from the insurance company.
- Write-off the book value of office equipment.
3. 12 April 2024:
- Record compensation received from the insurance company.
Scenario C:
On 30 March 2024, Company A has not received any documentation confirming compensation from the insurance company.
On 5 April 2024, Company A received documentation confirming compensation from the insurance company. The document provided assurance that Company A would indeed receive compensation, with no conditions requiring Company A to return the funds.
On 25 April 2024, Company A received compensation from the insurance company.
In this scenario:
31 December 2023 year-end:
Company A must not record compensation income from insurance companies and a receivable from the insurance company. However, if there’s a probability that economic benefits associated with the contingent asset will accrue to the entity, disclosure of the nature of contingent assets is required.
31 December 2024 year-end:
Company A must record compensation income from insurance companies and a receivable from the insurance company.
Accounting entries: (same amounts and journals as per Scenario A)
1. 13 November 2023:
- Record loss from the fire.
2. 5 April 2024:
- Record compensation due from the insurance company.
- Write-off the book value of office equipment.
3. 25 April 2024:
- Record compensation received from the insurance company
In conclusion, the inclusion of contingent assets in TFRS for NPAEs (Revised 2022) marks a significant step towards enhancing transparency and accuracy in financial reporting practices. As illustrated through various scenarios involving compensation from insurance companies, adherence to these standards ensures that entities recognize contingent assets appropriately and disclose relevant information to stakeholders. By understanding and applying these guidelines, businesses can navigate complex accounting scenarios with confidence, ultimately fostering trust and credibility in financial reporting.
Reference: TFRS for NPAEs (Revised 2022) TFAC website
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