Question

Presented below are three independent situations.

Situation 3: A company has adopted a policy of recording self-insurance for any possible losses resulting from injury to others by the company’s vehicles. The premium for an insurance policy for the same risk from an independent insurance company would have an annual cost of $4,000. During the period covered by the financial statements, there were no accidents involving the company’s vehicles that resulted in injury to others.

Instructions

Discuss the accrual or type of disclosure necessary (if any) and the reason(s) why such disclosure is appropriate for each of the three independent sets of facts above.

Short answer

The firm self-insuring the contingent risk and must be included in the financial statement.

Step-by-step solution

Meaning of Financial Statements

Financial statements are reports generated by a company's management to demonstrate the company's financial performance and position at a certain moment in time.

Discussing the appropriate disclosure that should be disclosed

The fact that a corporation decides to self-insure against damage to others caused by its vehicles is insufficient to cover the loss contingency that has not occurred as of the date of the financial statements. The amount of insurance premium would have been paid if a policy had been purchased to cover the firm against this particular risk that cannot be accrued or "reserved.”

Unless a specific event has occurred prior to the date of the financial statements that would impair an asset or create liability and the amount associated with that specific event can be properly calculated, an impairment contingency can occur. The fact that the firm is self-insuring this risk should be included in the financial statement to alert the reader to the risk posed by the lack of insurance.