With the recent flooding in Thailand, many businesses suffered from loss or damage of
assets, some of which are compensated by insurance companies, others are not
covered. Today Thai Accountant discusses how to account such transactions.

Based on generally accepted accounting principles, the loss of assets due to floods
or other natural disaster will be dealt with through two separate transactions:

STEP 1. Estimate the damage to the assets and set aside an allowance for impairment
immediately in the year when the flooding or disaster occurred (i.e. in 2011),
so that the carrying value of the assets is not higher than their recoverable
amount.

STEP 2. Record compensation from the insurer only when it is virtually certain
that such compensation will be received; for example, when there is a
letter from your insurer confirming the amount of the claims that will be paid.

Given the above steps, three scenarios are anticipated as follows:

Scenario 1: The impairment loss and insurance compensation are recorded in the same
year.

Under this scenario, the net effect of the flooding to the entity’s operating results
would be minimal if insurance compensation is definitely receivable in the same
accounting year and the loss from impairment is receivable from the insurance
company.

Scenario 2: The insurance compensation is recorded in the year after the entity records
the impairment loss.

Under this scenario, which is more likely under the current circumstance, the entity
will record an impairment loss in the year of flooding (2011) while the
insurance compensation will be recorded in subsequent year, if recoverable.
There will be a timing difference.

Scenario 3: An insurance claim has been lodged by the entity but it is subject to
dispute by the insurer.

Under this scenario, the entity will book an impairment loss in 2011 but cannot
recognize the insurance compensation until the dispute has been settled. A note
to account describing such fact is needed if the sum is significant.

How to account it in the financial statements?

If both transactions are recorded in the same accounting period, the net amount of
both transactions will be presented under one line in the income statement.

However, if the two transactions are recorded in different accounting periods (timing
difference), the impairment loss will be presented as an expense in one year
and the compensation as income in another year.

Contact MSNA, Thailand accountant, for your Thailand accounting and tax questions.