Cash-Flow Reporting Practices for Insurance Proceeds Related to PP&E

Abstract

According to SFAS No. 95, Statement of Cash Flows, insurance settlement proceeds received that are directly related to investing activities such as the destruction of a building or damage sustained by equipment are to be reported as investing cash flow. Proceeds received from insurance settlements related to property, plant, or equipment are analogous to proceeds received from the sale or disposal of property, plant, or equipment, and hence, should be afforded similar treatment, as investing cash flow.

Companies, however, differ in their treatment of such insurance proceeds. Some companies report them as investing cash flow while others report such cash flows as operating cash flow, potentially distorting cross-company comparisons. Overstatements of operating cash flow can arise when PP&E-related insurance proceeds are included. In this study, we highlight the cash flow reporting practices for insurance proceeds related to property, plant, and equipment and detail the inconsistencies noted.