Treatment of claims on self-insurance and on an outside insurance company

1.The Self-insurance Division in a public sector company undertakes insurable risk which would be otherwise taken by an outside insurance company. The premium bills are raised on the respective commodity/division for which the risk is under-written. Apparently, this becomes a charge to the commodity division and it becomes the income for the Self-insurance Division. In the event of loss, claim is filed by the respective commodity division on the Self-insurance Division. The Self-insurance Division processes the claims based on necessary documents and if the claim is in order the same is settled by the Self-insurance Division. Generally, at the end of the year, some claims, due to lack of complete documentation, are not settled by the Self-insurance Division. Consequently, Claims Recoverable Account is shown in the balance sheet of the commodity division while a suitable liability is provided in the Self-insurance Division. In other words, claims recoverable are shown on the asset side of the balance sheet by commodity division/branches and claims payable are shown on the liability side of the Self-insurance Division balance sheet. The company follows the practice of setting-off claims recoverable and claims payable against each other at the time of consolidation to avoid over-statement of both assets and liabilities.

2. In certain cases claims on outside insurance company relating to shortages/damages are uncertain of recovery due to lack of documentation or due to any other reason like not filing the claims within the prescribed period. Such claims are not taken as ‘Income’ but instead shortage/damage to that extent is written off in the Trading Account. However, for control purposes and to ensure that claims filed are taken in the accounting books and are not lost sight of, the following accounting entries are passed:

Debit Claims Recoverable A/c

Credit Claims Suspense A/c

3. The Claims Recoverable Account and Claims Suspense Account are netted (they are not shown either in the inner column or separately in the asset or liability side of the balance sheet). The Accounting Policy followed by the company in this regard is disclosed in the final accounts as under:

“Claims relating to shortages/damages at ports are accounted on the basis of survey reports. Doubtful claims are taken to ‘Claims Suspense Account’ instead of Profit and Loss Account. Claims income is booked if there is no uncertainty about its ultimate collection. The certainty about the collection of the claims is recognised if:

(a) The letter of acceptance or the letter of subrogation is issued; or

(b) there is a clear-cut provision for payment under the terms of policy on completion of certain documentation, and the aforesaid documentation is completed; or

4.The Comptroller & Auditor General of India, under section 619 (4) of the Companies Act, has commented on the accounts of the company for 1985-86 as under:

“Claims Recoverable Rs. 4614.69 Lakhs

This has been arrived at by setting-off credit balance of Claims Payable and Claims Suspense, the gross amounts in respect of which have not been indicated separately.”

5. The querists have sought the opinion of the Expert Advisory Committee on the following issues arising from the above:

(i) Is it in order for the company to net claims recoverable as appearing in the accounts of Units/Branches against payable shown in the accounts of Self-insurance Division?

(ii) Should the company continue to net the Claims Recoverable and Claims Suspense Accounts or should these be shown separately on both assets and liability side of the balance sheet.

Opinion January 12, 1987

1.The Committee is of the opinion that netting of claims recoverable and claims payable appearing as assets and liabilities in the balance sheets of Self-insurance Division and the commodity divisions, respectively, is in order, while consolidating the accounts of the company since these arise as a result of intra-company transfer of insurance services (self-insurance).

2. With regard to claims recoverable from an outside insurance company, relating to shortages/damages at ports, the recoverability of which is uncertain, the Committee notes that paras 9.1 and 9.2 of Accounting Standard 9 (AS-9) on “Revenue Recognition”, issued by the Institute of Chartered Accountants of India, provide as below:

“9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection.

9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time or raising any claim, e.g., for escalation of price, export incentives, interest etc, revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made”.

3.On the basis of the above principles of revenue recognition, the Committee is of the view that revenue recognition, in respect of the claims recoverable from an outside insurance company, should be postponed where the management considers their recoverability or collection uncertain. The Committee is therefore of the view that the practice followed by the company of not recognising such claims as income and netting Claim Suspense Account against Claims Recoverable Account, without separate disclosure of the amounts in respect thereof in the balance sheet, is in order.

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