Question
How should lost or stolen assets covered by insurance be accounted for?
How shall the insurance compensation in respect of the lost or stolen asset be accounted for?
Answer
Accounting treatment for lost or stolen assets depends on the nature of assets. For the purpose of accounting of lost or stolen assets, the accounting treatment may be classified into the following categories:
- Accounting for lost / stolen tangible fixed assets
- Accounting for lost / stolen stores and inventory
- Accounting for lost / stolen cash and other valuable assets
In all instances, the lost or stolen asset must be de-recognized from the balance sheet as no future economic benefits from the asset can be realized or controlled by the entity. Any insurance claim receipts must be accounted for separately rather than being adjusted in the carrying amount of the asset.
The treatment of loss varies slightly according to the nature of the asset as explained below. If the amount of loss is material, it may be necessary to present the loss separately in the income statement.
Fixed Assets
Accounting treatment for lost or stolen tangible fixed assets such as motor vehicles is similar to the accounting for disposal of such assets without any sale proceeds.
The fixed asset must be de-recognized from the statement of financial position and a loss must be recognized for the carrying amount of the lost or stolen asset.
Insurance compensation received or receivable on the asset may either be offset against the loss or presented separately as other income.
The accounting entries may therefore be summarized as follows:
|
Debit |
Loss on asset theft |
|
Debit |
Accumulated Depreciation |
|
Credit |
Property, plant and equipment (cost) |
|
Debit |
Bank / Insurance compensation receivable |
|
Credit |
Other income - Insurance compensation* |
*This may instead be set off against the loss on asset theft.
Inventory & Stores
Accounting for stolen or lost inventory depends on whether periodic or perpetual system is being used by the entity.
Under periodic system, inventory balance is computed at the period end and a single accounting entry for the closing stock is posted. If the computation of the closing balance of inventory under such system excludes the amount of inventory lost or stolen, no separate accounting entry would be necessary as the cost of goods sold would increase as a result of the reduction in closing stock thereby reflecting the impact of lost or stolen goods.
Under perpetual system however, inventory balance is updated regularly throughout the accounting period. Any inventory pilferage will need to be accounted for in a similar manner to the normal inventory issues during the period. The following journal entry may therefore be recorded to account for the loss or theft of inventory, stores and spares:
|
Debit |
Cost of goods sold |
|
Credit |
Inventory |
|
Debit |
Bank / Insurance compensation receivable |
|
Credit |
Other income - Insurance compensation* |
*This may instead be set off against the loss on asset theft
The amount of inventory de-recognized must include all elements of cost which are ordinarily included in the valuation of inventory and should not just consist of the purchase cost of direct materials (e.g. fright charges, direct labor, allocation of production overheads, etc).
Cash and other assets
The loss on theft of cash and any other assets may be simply be expensed to the income statement net of any insurance claim received or receivable. Following accounting entries would therefore be required:
|
Debit |
Loss on asset theft (balancing amount) |
|
Debit |
Accumulated Depreciation |
|
Credit |
Asset (carrying amount) |