FAR · Select transactions · 6 practice questions
Insurance Recoveries Under ASC 450: When to Record
Accrue a probable, reasonably estimable loss without subtracting insurance; recognize a separate reimbursement asset only when recovery is probable. Follow the steps below to measure the loss, test the recovery, and keep the balance sheet and disclosures gross.
Try one first
Hint
Work in two steps: first choose which amount from the range to accrue, then decide whether the insurer's written acceptance should be recorded as a separate receivable or treated differently.
Answer D. Under ASC 450, when a loss is probable and the amount is a range and no amount within the range is a better estimate, the entity accrues the minimum of the range ($900,000). The insurer's written acceptance for $500,000 is a probable recovery and should be recognized as a separate receivable (not netted against the liability). Delta should disclose the gross loss range and that up to $400,000 additional loss is possible.
Why not A: This is tempting if one believes recognition must await settlement; it is incorrect because ASC 450 requires accrual when a loss is probable and reasonably estimable, and a probable insurer acceptance meeting collectibility criteria should be recognized rather than deferred.
Why not B: This is tempting because it reports a smaller net exposure by offsetting the recovery; it is incorrect because ASC 450 requires accruing the minimum amount of the range and recognizing a probable insurance recovery as a separate receivable rather than netting it against the liability.
Why not C: This is tempting as an overly conservative approach to accrue the maximum; it is incorrect because when no amount is a better estimate GAAP directs accrual of the minimum of the range, and a probable, collectible insurance recovery should be recognized as a receivable before cash collection.
Step by step
- Test the loss first
Test whether the loss is probable and reasonably estimable before considering insurance. Delta meets both tests: its probable lawsuit loss ranges from $900,000 to $1,300,000, with no amount identified as a better estimate.
- Measure the full loss
Accrue the best estimate within the range; if no amount is a better estimate, accrue the minimum. Delta records a $900,000 loss and liability, not the midpoint or maximum.
- Test recovery separately
Recognize a reimbursement receivable only when collection is probable. Delta's insurer accepted $500,000 in writing, and collection is probable, so Delta records a separate $500,000 asset.
- Exclude any contingent gain
Recognize a probable recovery only up to the related recorded loss. Any excess is a gain contingency and is not recognized before realization.
- Keep balance sheet amounts separate
Show Delta's $900,000 liability and $500,000 insurance receivable separately. Do not replace them with a $400,000 net liability.
- Disclose the gross exposure
Disclose the lawsuit, the $900,000 to $1,300,000 gross loss range, and the accepted $500,000 coverage. The possible additional loss above the accrual is $400,000; insurance does not reduce that disclosure.
Key points
- Remember: Insurance changes the asset, not the amount of the loss liability.
- Evidence received before issuance can support recognition when it confirms conditions that existed at year-end.
- A policy limit alone does not prove that collection is probable.
How the exam traps you
- Skipping the loss accrual because insurance is expected. Accrue the probable, reasonably estimable loss without subtracting insurance.
- Replacing the liability and receivable with one net liability. Recognize and show the loss liability and recovery asset separately.
- Recording a reimbursement merely because a claim was submitted. Recognize the recovery only when collection is probable, not merely reasonably possible.
Question 2
Hint
Work in three parts: (1) choose the accrual amount from the loss range under ASC 450, (2) decide whether a probable insurance recovery is netted or recorded separately, and (3) determine which other exposures still require disclosure.
Answer D. Under ASC 450, when a loss is probable and reasonably estimable but only a range can be determined and no amount in the range is a better estimate, the minimum amount in the range must be accrued, here $8.0 million. A probable insurance recovery is recognized separately as an asset (insurance receivable) and should not be netted against the liability. Reasonably possible amounts above the accrued minimum (the excess up to $12.0 million) and a separate reasonably possible punitive‑damages exposure must be disclosed.
Why not A: This distractor tempts because acknowledging a probable insurer recovery makes netting to a smaller net liability look attractive. ASC 450 requires the loss contingency to be accrued when probable and reasonably estimable and any probable insurance recovery to be recognized separately as an asset (insurance receivable); netting the two misstates both the liability and the asset and obscures disclosure needs. Disclosures should reflect the full possible loss exposure rather than a netted figure.
Why not B: This is tempting to those who think accrual requires exact certainty or who delay recognizing insurance recoveries until cash receipt. ASC 450 requires accrual when a loss is probable and reasonably estimable; waiting to accrue understates liabilities. Likewise, a probable insurance recovery should be recognized as an asset (receivable) when collection is probable, not deferred until cash is collected.
Why not C: This option appeals to candidates who prefer a single-point estimate (midpoint) within a range. However, ASC 450 states that when no amount in a range is a better estimate than any other, the minimum of the range should be accrued, not the midpoint. In addition, any reasonably possible loss above the accrued amount must be disclosed.
Question 3
Hint
Analyze each lawsuit separately: first decide whether recognition is allowed, then determine the amount, if any, to record.
Answer B. Under US GAAP, a loss contingency that is probable and reasonably estimable must be accrued. When the estimate is a range and no amount within the range is a better estimate, the minimum of the range is accrued (with disclosure of the range). Expected recoveries that are gain contingencies are not recognized until realized, so no receivable is recorded for the supplier matter.
Why not A: Tempting for students who apply undisciplined conservatism (choose the largest loss) and treat gains symmetrically with losses. GAAP requires accruing the minimum when a loss is stated as a range with no better estimate, and gain contingencies are not recognized prior to realization.
Why not C: This is incorrect because the customer lawsuit meets the criteria for accrual (probable and reasonably estimable) even though unresolved, so it must be recorded. The supplier matter remains a gain contingency and thus is not recognized.
Why not D: Incorrect because the matters are unrelated and there is no right of offset; gain contingencies are not recognized and therefore cannot be netted against recognized losses.
Question 4
Hint
Treat each matter separately: measure the litigation accrual using the 'probable' and 'best estimate' guidance, recognize the purchase-commitment loss on the contract premium over market, and remember a probable insurance recovery is recognized only to the extent it does not create a gain over the related accrued loss.
Answer D. Accrue the litigation loss at the minimum of the $3.0-$4.0 range ($3.0 million) because no amount in the range is a better estimate. Also record the unavoidable purchase-commitment loss of $0.3 million (1.2 − 0.9), for total loss accruals of $3.3 million. Recognize the insurer's probable $3.4 million reimbursement as an asset only to the extent of the related accrued litigation loss (here limited to $3.0 million); recognizing a recovery that would exceed the recorded loss would effectively create a gain from the contingency, which is not appropriate.
Why not A: This overstates the litigation accrual by using the $4.0 million upper end of the range. When no amount within a loss range is a better estimate, accrue the minimum ($3.0 million), not the maximum; thus total accruals are not $4.3 million.
Why not B: This is tempting because the insurer's reimbursement is stated as probable for $3.4 million, but GAAP limits recognition of an insurance recovery to the amount of the related accrued loss; you cannot recognize a recovery that would produce a gain on the contingency, so the recovery is capped at the $3.0 million litigation accrual.
Why not C: This incorrectly ignores the accrued litigation loss and effectively nets the litigation and insurance positions; GAAP generally requires recognizing the probable litigation loss (and the separate purchase-commitment loss) and recognizing a probable insurance recovery only as an asset to the extent of the related accrued loss.
Question 5
Hint
Separate the accounting for the loss from the accounting for the possible insurance recovery, and pay attention to whether the range includes a best estimate.
Answer B. Under U.S. GAAP (ASC 450), a loss that is probable and reasonably estimable should be accrued. When counsel provides a best estimate within a range, the entity records that best estimate (here $1,100,000) rather than automatically using the low end. Potential insurance recoveries are evaluated separately and are not recognized until collection is probable, so no insurance receivable is recorded. The company should disclose the nature of the contingency and that the ultimate loss could exceed the amount accrued.
Why not A: Tempting because students recall accruing the minimum when a loss is given as a range. That rule applies only when no amount in the range is a better estimate; here counsel identified $1,100,000 as the best estimate, so the accrual should be $1,100,000, not the low end.
Why not C: This is attractive because it reflects the net economic effect, but GAAP requires a separate assessment of recoveries. Because acceptance by the insurer and collection are not probable at the issuance date, an insurance receivable cannot be recognized.
Why not D: This misapplies the requirement for finality. Exact settlement is not required; once a loss is probable and reasonably estimable, it must be accrued even though the final settlement amount and any reimbursement remain uncertain.
Question 6
Hint
Evaluate each item separately: apply the loss‑range rule for the litigation, treat a probable reimbursement as a separate receivable (do not net it against the liability), and determine whether the unasserted environmental claim meets the 'probable and reasonably estimable' threshold for accrual.
Answer A. Accrue the litigation loss using the loss‑range rule (ASC 450): when no amount in the range is a better estimate, accrue the minimum of the range ($1.8M). The noncancelable purchase commitment produces an additional loss of (12 − 10) × 400,000 = $0.8M, so total liabilities = $1.8M + $0.8M = $2.6M. A probable insurance recovery is recorded as a separate receivable ($1.0M) rather than netted against the liability. The environmental matter is disclosed only because an unfavorable outcome is only reasonably possible if the claim is asserted, not probable.
Why not B: This is tempting because it nets the probable $1.0M insurance recovery against the litigation estimate (1.8 − 1.0 = 0.8) and then adds the $0.8 purchase‑commitment loss to get $1.6M. GAAP does not permit netting a probable reimbursement against the liability; probable recoveries are recognized as separate assets and the full liability is recorded, so this netting arithmetic is incorrect.
Why not C: This attracts candidates who choose the high end of the litigation range to be 'conservative' (2.6) and then add the $0.8 purchase loss (2.6 + 0.8 = 3.4). Under GAAP's loss‑range rule, when no amount in the range is a better estimate, the minimum amount is accrued, not the high end, so the litigation accrual should be $1.8, not $2.6.
Why not D: This is tempting because the assertion of the environmental claim is 'probable,' leading candidates to also accrue the estimated $0.9M loss (1.8 + 0.8 + 0.9 = 3.5). However, accrual for an unasserted claim requires that an unfavorable outcome be probable and reasonably estimable. Here the unfavorable outcome, if the claim is asserted, is only reasonably possible, so the item should be disclosed, not accrued.
Common questions
When can an insurance recovery be recognized under ASC 450?
Recognize a separate receivable when recovery of the recorded loss is probable. Cash collection is not required, but a submitted claim alone does not establish probable recovery.
Can insurance recoveries be netted against the loss liability?
No. The balance sheet shows a separate liability and receivable, even if the income statement presents the net effect.
How much additional loss must be disclosed?
Use the gross estimated loss range, not the range after insurance. For Delta, the possible additional loss is $1,300,000 minus the $900,000 accrual, or $400,000.
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