4.9 Classification of Insurance Proceeds in the Statement of Cash Flows

ASC 230-10-45-21B states that “[c]ash receipts resulting from the settlement of insurance claims, excluding proceeds received from corporate-owned life insurance policies and bank-owned life insurance policies, shall be classified on the basis of the related insurance coverage (that is, the nature of the loss).” In addition, for lump-sum settlements, “an entity shall determine the classification on the basis of the nature of each loss included in the settlement.”

Entities should determine the classification of insurance receipts that have aspects of more than one class of cash flows by first applying specific guidance in U.S. GAAP. When such guidance is not available, financial statement preparers should separate each identifiable source of cash flows on the basis of the nature of the underlying cash flows. Each separately identified source of cash receipts should then be classified on the basis of its nature. Classification based on the activity that is most likely to be the predominant source or use of cash flows is appropriate only when the source of insurance receipts has multiple characteristics and is not separately identifiable. For additional information on the determination of more than one class of cash flows, see Section 6.4 of Deloitte’s Roadmap Statement of Cash Flows.

For example, insurance settlement proceeds received as a result of a claim made in connection with the destruction of productive assets should be classified as cash inflows from investing activities because the settlement proceeds could be analogous to proceeds received on the sale of such assets. However, proceeds received as a result of claims related to a business interruption should be classified as operating activities.

Example 4-7

Business Interruption Cash Flow Classification

A flash flood destroys a fleet of RVs and a building at the corporate headquarters of RV Company XYZ, leaving the RV dealer inoperable for three months until it can restock its inventory and repair the corporate headquarters. RV Company XYZ has property and business interruption insurance that covers lost profit margins, lost inventory, and damaged equipment and property. Covered losses under the insurance policy include natural disasters, such as floods. RV Company XYZ receives a lump-sum insurance payment of $85 for lost profit margin, lost RV inventory, and corporate headquarters repairs. In a manner consistent with the submitted claim, XYZ determines that $15 should be allocated to lost profit margin, $45 to damaged inventory, and $25 to rebuilding a portion of the corporate headquarters.

RV Company XYZ appropriately classifies the insurance receipt in the statement of cash flows as follows:

$15 lost profit margin = operating inflow.
$45 lost inventory = operating inflow.
$25 corporate headquarters reconstruction = investing inflow.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.