Reimbursements expected from third parties

Learning objectives

• Determine whether an expected reimbursement (insurance, indemnity, supplier warranty) may be recognised: virtual certainty, separate asset, cap equal to the provision.L2, L3
• Calculate the amount of the capped reimbursement asset and the net expense presented.L2, L3
• Recognise the gross provision and the reimbursement asset separately.L2, L3
• Distinguish the situation in which the entity remains liable for the full amount (gross provision) from that in which it is not liable if the third party fails to pay (costs excluded).L3

Normative references

• IAS 37 §53Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognised when, and only when, it is virtually certain that it will be received if the entity settles the obligation; it is treated as a separate asset, the amount of which does not exceed the amount of the provision.
• IAS 37 §54In the statement presenting profit or loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.
• IAS 37 §55Sometimes an entity is able to look to another party to pay part or all of the expenditure (insurance contracts, indemnity clauses, suppliers' warranties); the other party may either reimburse amounts paid by the entity or pay the amounts directly.
• IAS 37 §56In most cases the entity remains liable for the whole of the amount and would have to settle it if the third party failed to pay: a provision is recognised for the full amount of the liability, and a separate asset for the expected reimbursement is recognised when it is virtually certain.
• IAS 37 §57In some cases, the entity will not be liable for the costs if the third party fails to pay: it then has no liability for those costs, and they are not included in the provision.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

10 questions

• A reimbursement expected from an insurer is recognised as soon as it is probable.L2
• How does Pellarine present in its statement of financial position a provision of 200,000 and a virtually certain reimbursement of 120,000 expected from its insurer?L2
• Quilmar recognises a provision of {provision_amount} for fire damage caused to a customer. Its insurer has confirmed in writing that it will cover {virtually_certain_reimbursement}, an amount virtually certain to be received if Quilmar compensates the customer. Compute the reimbursement asset and the net expense if Quilmar presents the expense net of the reimbursement in profit or loss.L2
• Rovalis provides {recall_provision} for the recall of defective toys. The manufacturer of the faulty parts has irrevocably undertaken to pay it {indemnity_confirmed}, including a commercial compensation; this payment is virtually certain if Rovalis carries out the recall. Compute the reimbursement asset recognised and the net expense presented (option chosen by Rovalis).L3
• Sablonne must compensate a neighbour for water damage caused by its installations; the best estimate is {damages_estimate}. Sablonne remains liable for the whole amount towards the neighbour, but its insurer will virtually certainly reimburse {insurer_share}. Record the year-end entries (gross presentation in profit or loss).L2
• Taurelle must replace at its customers' premises boilers fitted with a defective burner; the best estimate of the cost is {recall_cost}. The burner supplier, under its contractual warranty, will virtually certainly reimburse {supplier_warranty}; Taurelle would nevertheless have to pay the full amount if that supplier defaulted. Record the provision and the reimbursement (gross presentation in profit or loss).L3
• Ulmeta has engaged a subcontractor to remove asbestos from a building. The contract signed with the owner provides that this subcontractor pays directly the costs of making safe an incident that occurred in 20X5, Ulmeta not being liable for them if the subcontractor fails to pay. How does Ulmeta account for these costs?L3
• Vélanne is ordered to pay 500,000 to a customer. Its insurer has confirmed it will cover 350,000, which is virtually certain; if the insurer did not pay, Vélanne would remain liable for the full amount. What is the treatment in the statement of financial position?L3
• Wilmara provided 70,000 for a loss caused to a third party. Its insurer will virtually certainly pay it 90,000, an amount that includes ancillary costs. The accountant recognised a reimbursement asset of 90,000 and a net gain of 20,000 on the claim. What is the error?L3
• In the statement presenting profit or loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement, for example from an insurer.L2