1.32 Query:          

  Treatment of profit on settlement of an insurance claim.

1. A public sector corporation insured its entire fleet of helicopters. Against the original cost of Rs. 3.20 crores for a Dauphin helicopter, the sum assured for insurance purposes was taken at Rs. 5.10 crores being the approximate replacement value. There was an accident in December, 1989 of a Dauphin helicopter for which the claim was settled by the insurance company in March, 1990. The written down value at the time of crash was Rs. 2.55 crores. The corporation proposes to credit the entire profit of Rs. 2.55 crores (Rs. 5.10 crores claim settled less Rs. 2.55 crores written down value) to the profit and loss account for the year 1989-90 for the purposes of its accounts. There is no prohibition in the Articles of Association of the corporation for such treatment and there is no fall in the value of other assets and the “Capital Profit” has been realised.

2. The querist has sought the opinion of the Expert Advisory Committee as to whether the above procedure is correct and in accordance with the normally acceptable accounting practices. The querist has also stated that the corporation intends to use the money received on account of insurance claim settlement for the purposes of acquiring a new helicopter at a future date.

                                                                                        Opinion                   December 6, 1990

1. The opinion of the Committee, given in following paragraphs, is purely from the accounting point of view and it is presumed that the written down value referred to in the query means the written down value as per the books.

2. In the facts and circumstances of the present case, the Committee is of the opinion that it will be appropriate to credit the profit and loss account with the profit arising on settlement of insurance claim (i.e., the excess of insurance claim over the written down value of the helicopter) with the disclosure as per para 5 below.

3. The Committee notes that the clause 3 (xii) (b) of Part II of Schedule VI to the Companies Act, 1956, requires disclosures of “Profits or losses in respect of transactions of a kind, not usually undertaken in circumstances of an exceptional or non-recurring nature, if material in amount, in the profit and loss account.”

4. The Committee also notes that Accounting Standard (AS) 5 on ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India, defines ‘Extraordinary Items’ as below:

“3.2 ‘Extraordinary items, are gains or losses which arise from events or transactions that are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. These would also include material adjustments necessitated by circumstances, which though related to previous periods are determined in the current period.’

5. The Committee is, therefore, of the view that profit arising on settlement of insurance claim is an extraordinary item which should be disclosed as per para 10 of the aforesaid standard as below:

“Extraordinary items of the enterprise during the period should be disclosed in the statement of profit and loss as part of net income. The nature and amount of each such item should be separately disclosed in a manner that their relative significance and effect on the current operating results of the period can be perceived.”