LIVING and doing business in the Philippines means learning to live with typhoons, floods, earthquakes and other calamities. We prepare as much as we can but, when disaster strikes, damage to property and business operations can still be difficult to avoid.
Once everyone is safe, businesses begin counting the cost. There may be damaged equipment, flooded inventories, repairs to buildings and days or even weeks of interrupted operations.
For an insured business, there is at least some comfort in knowing that part of the loss may be recovered. But this brings up an accounting question that is easy to overlook: If the business is insured, can it immediately record the amount it expects to receive from the insurance company? The answer is not always yes.
Insurance doesn’t erase the loss
IMAGINE a company whose warehouse is flooded during a typhoon. A machine with a carrying amount of P5 million is badly damaged and can no longer be used. Fortunately, the machine is insured.
It may be tempting to say, ‘There is no problem. Insurance will pay for it.’ Accounting looks at it differently.
The damage to the machine and the possible insurance recovery are two separate matters. The company must first account for what happened to the asset. Depending on the condition of the machine, this may involve recognizing an impairment loss under IAS 36 or removing the asset from the books under IAS 16 if it has been destroyed or can no longer provide future benefits.
Having insurance does not allow the company to keep a damaged or destroyed asset in its books as though nothing happened.
A claim is not yet cash
SUPPOSE the company files a P5-million insurance claim the day after the typhoon.
Does this mean it can immediately record a P5-million receivable? Not necessarily.
Filing the claim is only the start of the process. The insurer may still need to inspect the machine, review the policy and confirm whether the damage is covered. There may be deductibles, limits or exclusions. The insurer may also approve an amount lower than what the company originally claimed.
IAS 16 provides that compensation from third parties for property, plant and equipment that has been impaired, lost or given up is recognized in profit or loss when the compensation becomes receivable.
Until then, management needs to look carefully at the facts rather than simply assume that every peso claimed will eventually be collected.
What if the recovery is still uncertain?
THIS is where IAS 37 on provisions, contingent liabilities and contingent assets may also become relevant.
When a possible insurance recovery remains uncertain, the company may be dealing with a contingent asset. A contingent asset is not recognized in the financial statements.
As the claim progresses, however, circumstances may change. If the inflow of economic benefits becomes probable, appropriate disclosure may be needed. Once the inflow becomes virtually certain, it is no longer considered a contingent asset, and recognition becomes appropriate.
In practical terms, there is a big difference between ‘We filed a claim,’ ‘The insurer will probably pay,’ and ‘The insurer has confirmed what it owes us.’ Those statements may sound similar in ordinary conversation, but they can have different accounting effects.
Insurance may not cover everything
LET us go back to the P5-million machine.
After completing its review, suppose the insurer confirms that it will pay only P4.5 million because part of the loss is not covered by the policy.
The accounting for the damaged machine and the insurance compensation remains separate. The company recognizes the effect of losing the machine and accounts for the P4.5-million recovery when the requirements for recognition are met.
The example shows an important point: being insured does not always mean being fully protected from loss.
What if the typhoon comes after year-end?
THERE is another issue when a calamity happens shortly after the reporting date.
Suppose the company’s year-end is December 31, but a major typhoon strikes in January before its financial statements are authorized for issue.
IAS 10 on events after the reporting period generally considers a new event arising after year-end as non-adjusting. The company does not go back and change its December 31 figures simply because the typhoon happened in January.
However, if the damage is material, the company may need to tell readers of the financial statements what happened and provide an estimate of the financial effect, when this can be reasonably determined.
Telling the financial story properly
INSURANCE can be a lifeline after a calamity. It can provide funds to repair buildings, replace equipment and help a business reopen.
But insurance coverage does not make a loss disappear, and filing a claim does not automatically create income or a receivable.
Financial reporting should tell the story in the order it actually happens: something was lost, a claim was made, the claim was assessed, and eventually, an amount may be recovered.
After a calamity, rebuilding the business may take time. The accounting should not rush ahead of that reality.
Floyd C. Paguio, CPA, MBA, is the chairman of Paguio, Dumayas and Associates, CPAs, (PDAC), the Philippine member firm of PrimeGlobal International. He is also the president of KCD College of Accountancy in Alaminos, Laguna, the co-chairman for students and faculty affairs of the Picpa Metron Manila Region FY 2026 – 2027. The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official positions of these organizations and the BusinessMirror.