Accounting treatment of compensation from insurance for bad debts under TFRS for NPAEs

In cases where the claim amount is lower than the amount of the bad debt, and an allowance for doubtful accounts was previously set up, the Thai entity must recognise the compensation properly and adjust its financial statements accordingly. 
 

Approaches to recognising insurance compensation 

When an HQ confirms that it will transfer the payment of an insurance claim to a Thai company, there are different approaches to recognising the amount, depending on accounting policies and the degree of certainty of receiving the compensation:  

1. Recognising the payment under ‘Other receivables’  

1. If the claim amount is confirmed and measurable, the Thai company may recognise it under ‘other receivables’ from the HQ before the cash is received. 
2. This approach follows the principle that an asset should be recognised when it is probable that future economic benefits will flow to the entity and the amount is reliably measurable. 
3. Journal entry upon confirmation:  
   Dr. Other receivables – HQ  
   (Insurance Claim Receivable) XXX  
   Cr. Other income  
   (Insurance compensation) XXX 
4. When the cash is received, the receivable is cleared. 

2. Recognising the payment as a contingent asset (disclosure only) 

1. If the claim amount is uncertain (e.g., pending approval, subject to dispute, or conditional upon further actions), it should not be recognised as an asset. 
2. Instead, it should be disclosed as a contingent asset in the notes to the financial statements until receipt is virtually certain. 
3. This treatment ensures compliance with the principle of prudence under the TFRS for NPAEs. 

3. Recording the payment only upon receipt 

1. If the Thai company only records income upon the receipt of funds, no receivable is recognised in advance. 
2. This approach ensures that revenue is recognised only when the cash is received, which may be preferable for entities with conservative accounting policies. 
3. In this case, the insurance compensation is recorded as ‘other income’ at the time of the cash inflow. 
    

Accounting treatment when transactions are recorded upon receipt of the payment  

If the Thai company records all transactions on the day that the insurance payment is received, the journal entries should be structured as follows: 

1. Write-off of bad debt  

The full amount of the bad debt should be written off against the previously established allowance for doubtful accounts, as follows: 

Dr. Allowance for doubtful debt XXX  
Cr. Trade receivables XXX  
XXX = Full amount of bad debt being written off 
 

Recognition of cash received from the HQ 
When the payment is received, it should be recorded as follows: 
Dr. Cash / Bank YYY  
Cr. Other income  
(Insurance compensation) YYY  
YYY = Insurance compensation received from the HQ  
For example: 

• Bad debt amount = THB 100,000 
• Allowance for doubtful accounts = THB 100,000 
• Insurance compensation received = THB 60,000  
   

Journal entries on the day that the cash is received 

Dr. Allowance for doubtful debt 100,000  
Cr. Trade receivables 100,000  
Dr. Cash / Bank 60,000  
Cr. Other income  
(Insurance compensation) 60,000  
 

Key issues 

• The full amount of the bad debt is written off against the allowance for doubtful accounts. 
• The insurance payment is recorded as ‘other income’ rather than directly offsetting the bad debt. 
• Companies should ensure proper documentation of the claim process for audit and financial reporting purposes. 
   

Regulatory note on tax treatment  

Companies must be aware that the recognition of a bad debt expense as a tax-deductible expense must be in compliance with the Thai Revenue Department’s regulations. Specifically, bad debts must meet certain conditions, such as: 

• Adequate collection efforts must be demonstrated. 
• Specific write-off procedures must be followed. 
• Documentation must be maintained to support the deductibility of the bad debt expense.  
   

Conclusion 

Proper accounting treatment of compensation from insurance for bad debts is essential to ensure compliance with the TFRS for NPAEs and to maintain accurate financial reporting. Companies must carefully assess whether to recognise the claim under ‘other receivables’, as a contingent asset, or only upon receipt of the payment based on the certainty of the claim. In addition, when recording bad debt write-offs, businesses should be mindful of tax implications and take care to comply with the Thai Revenue Department’s regulations to ensure tax deductibility.