4.8 Income Statement Classification of Loss Recoveries and Gain Contingencies

As discussed in Section 4.6, ASC 220-30-45-1 addresses the income statement presentation related to business interruption insurance and allows an entity to “choose how to classify business interruption insurance recoveries in the statement of operations, as long as that classification is not contrary to existing generally accepted accounting principles (GAAP).” Further, ASC 410-30 provides guidance on the income statement presentation of environmental remediation costs and related recoveries, such as insurance recoveries. ASC 410-30-45-4 states that “environmental remediation-related expenses shall be reported as a component of operating income in income statements that classify items as operating or nonoperating. Credits arising from recoveries of environmental losses from other parties shall be reflected in the same income statement line.”

Although authoritative income statement classification guidance does not exist for many other types of loss recoveries, such as involuntary conversions, in practice, entities have generally applied the guidance in ASC 410-30 by analogy when determining the appropriate classification of other loss recoveries.

For recoveries in which the recovery proceeds exceed the incurred loss, resulting in a gain, an entity should consider other authoritative literature, including applicable SEC regulations (e.g., SEC Regulation S-X), when determining whether it is appropriate to classify the gain within the related income statement line item as the loss recovery. Depending on the nature of the gain, entities should consider whether it is appropriate to classify it as operating or nonoperating. In determining whether it is appropriate to classify a loss, a loss recovery, or a gain as operating or nonoperating, entities may consider SEC Regulation S-X, Rule 5-03. Although Rule 5-03 does not define items that should be classified as operating, it does provide examples of items that should be classified as nonoperating.

Entities should provide sufficient disclosure, if material, to enable financial statement users to determine in which financial statement line item the gain has been recognized.