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How to Record Insurance Proceeds on Leased Assets

If you are trying to record insurance proceeds on assets you own, we have thoroughly covered that topic in this post. If you want to know how to account for insurance proceeds on assets that you lease, keep reading.

As an example, let’s say you lease a building and the roof was damaged in a storm. The cost to repair the roof was $25,000. The insurance company paid you $20,000 for your loss. The roof was not on your balance sheet because this is an operating lease and you don’t own the roof. How do you record this?

Your roof was probably leaking so you fixed it fast. You paid for the repair before the insurance proceeds arrive. Should the repair be capitalized (put on your balance sheet) or expensed directly to your income statement under repair expense?

That question can be tricky. The best idea is to have a written asset capitalization policy that states your company standards. For instance, your policy might state that any asset under $500 is automatically expensed as de minimis regardless of its useful life. The IRS increased their de minimis standard to $2,500 as of January 1, 2016. Set your threshold at what works best for your organization. A lower standard increases workload on your accounting staff, but maximizes income. 

In this case, the repair is likely over your de minimis threshold. The next question to answer is whether the repair maintained the asset’s useful life, extended its useful life or improved its capacity. Did your roof repair extend the useful life of the roof? If it did, capitalize it and amortize it over the lesser of the extended life of the asset or the term of your lease.

If the repair did not extend the life of the asset or it’s capacity, expense it. Below are some example journal entries.

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