Final answer:
A large anticipated insurance recovery should be reported as an account receivable along with additional disclosure that explains the nature of the contingency. It is not to be treated as deferred revenue or a mere disclosure unless the recovery is uncertain.
Step-by-step explanation:
When a company anticipates an insurance recovery, it is common practice to recognize this as an account receivable, provided that the recovery is virtually certain. In such a case, this would be paired with additional disclosure explaining the nature of the contingency. The disclosure offers detail about the insurance claim, including the circumstances, amount expected, and any uncertainties that may affect the recovery of the amount recorded.
It's important to note that the insurance recovery should not be reported as deferred revenue, as this implies the company has an obligation to provide goods or services in the future, which is not the case with an insurance recovery. Additionally, it should not simply be an accrual unless it meets the criteria for recognition in the financial statements, which typically involves a high probability of receipt and reliable measurement.
While a mere disclosure with no recognition on the balance sheet is more conservative, it is used when the recovery is not considered virtually certain. In such cases, the disclosure in the notes to the financial statements ensures that readers are aware of the situation without it impacting the financial position of the company until it becomes certain.