Your non-profit or governmental entity has encountered a storm and the entity has suffered damage. Now what? After a visit from the insurance company, an amount is determined that your entity will receive. However, some confusion might lie within how to account for such funds.
When monies are received from an insurance company, it’s considered an insurance recovery. If your entity utilizes the full accrual basis of accounting (i.e. non-profit organizations and government wide and enterprise funds within governmental entities), the insurance proceeds should be netted in the same expense account utilized for the necessary repairs.
If your entity utilizes the modified accrual basis of accounting (i.e. governmental funds within governmental entities), the revenue and expenditure transactions should be recorded separately. The revenue should be coded to “Other Financing Source – Compensation for Loss or Damage to Capital Assets.” When expenditures are incurred for necessary repairs, they are coded to a corresponding expenditure account.
If it is determined that the asset’s value on the depreciation schedule is not impaired due to the damage (there are a series of tests to determine such which are not addressed in this article), the entity needs to expense the necessary repairs to get the asset back to its remaining expectant life per the depreciation schedule. If no impairment has occurred, no changes are made to the asset on the depreciation schedule.
The accounting described above applies to situations when the damage to the asset and insurance recovery both take place within the same year. However, if the damage to the asset and corresponding insurance recovery occur in two different years, it needs to be determined whether insurance recoveries are realizable at year-end. Is there documentation to show what the entity will receive in the future for insurance proceeds? If so, revenue and a receivable can be recorded as of year-end. However, when dealing with governmental funds under the modified accrual basis of accounting, keep the availability period in mind with whether or not the transaction can be considered receivable and revenue or receivable and deferred outflow of resources.
The accounting described above pertains only to insurance proceeds, and not to disaster funds received from a granting agency, such as the Federal Emergency Management Agency (FEMA).
Please feel free to contact Jean Smith, Traci Hanson, Shelley Goodrich, or Sandra Weaver with questions concerning insurance proceeds for your non-profit or governmental entity.