4.2 Involuntary Conversions
Insurance is often maintained to mitigate losses in the event of
property damage or casualty losses. The recognized loss and the associated recovery
proceeds (through insurance proceeds or other sources of recovery) are treated as
two separate events and therefore two separate units of account. The principle
underlying this separation, which is the basis for the accounting models described
in Sections 4.3 and
4.4, is derived
from the involuntary conversion guidance codified in ASC 610-30.
ASC 610-30
25-2 An
involuntary conversion of a nonmonetary asset to monetary
assets and the subsequent reinvestment of the monetary
assets is not equivalent to an exchange transaction between
an entity and another entity. The conversion of a
nonmonetary asset to monetary assets is a monetary
transaction, whether the conversion is voluntary or
involuntary, and such a conversion differs from exchange
transactions that involve only nonmonetary assets. To the
extent the cost of a nonmonetary asset differs from the
amount of monetary assets received, the transaction results
in the realization of a gain or loss that shall be
recognized.
25-3
Involuntary conversions of nonmonetary assets to monetary
assets are monetary transactions for which gain or loss
shall be recognized even though an entity reinvests or is
obligated to reinvest the monetary assets in replacement
nonmonetary assets. However, the requirement of this
Subtopic with respect to gain recognition does not apply to
an involuntary conversion of a last-in, first-out (LIFO)
inventory for which replacement is intended but not made by
year-end and the taxpayer does not recognize gain for income
tax reporting purposes. Paragraph 270-10-45-6(b) provides an
exception for the liquidation of a LIFO inventory at an
interim date if replacement is expected by year-end.
Accordingly, that exception applies to an involuntary
conversion of a LIFO inventory if replacement is expected by
year-end.
25-4 In some
cases, a nonmonetary asset may be destroyed or damaged in
one accounting period, and the amount of monetary assets to
be received is not determinable until a subsequent
accounting period. In those cases, gain or loss shall be
recognized in accordance with Topic 450.
When a nonmonetary asset (e.g., property) is involuntarily converted
to a monetary asset (e.g., an insurance receivable), an entity must recognize the
effects of the monetary transaction even if the proceeds are reinvested (voluntarily
or by requirement) in the replacement or repair of the nonmonetary asset. The loss
of a nonmonetary asset and subsequent monetary recovery through insurance are
therefore accounted for as two separate units of account.
Example 4-1
Involuntary
Conversion
A fire destroys Company X’s operating plant.
Company X must write off the plant, recognizing a loss,
regardless of its decision or the insurance company’s
requirements to use any insurance proceeds to replace or
repair the plant. If the property or equipment is destroyed
or damaged in one period and the recovery proceeds are not
recognizable (e.g., not determinable) until a subsequent
period, X recognizes the loss when incurred without
considering possible recognition of a monetary recovery
(e.g., cash proceeds).
See Example 4-3 for another illustration of the
accounting for an involuntary conversion.