A company lost stock in a fire accident. Insurance claim was received for a lesser amount.
The company plans to file a suit against the insurance company for the balance amount. I have suggested the accounting treatment as follows :
1) Book the loss in the current year.
2) Disclose a contingent asset for the balance amount not received.
Please suggest if the same is correct. Also, will this treatment affect my claim suit or my standings in the same.
Whether there is any alternate treatment?
Depending on the probability of recovery, you could also recognize the full amount of the insurance claim receivable and create a provision to the extent not recovered / claimed in the suit. In any case, the recognition of a provision or disclosure of a contingent asset will not affect the company's standing in the claim for the balance insured sum, since accounting is based on the concept of prudence. It is definitely possible that the company still wins the suit and becomes entitled to the balance sum, in which case, such sum can be recognized.
khushbu what is contingent asset?how can u show it in balance sheet?
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