I haven't had any experience with this issue but I would treat this like typical insurance because you did experience an involuntary conversion, albeit not in the usual sense as you mentioned above. ASC 605-40 mentions involuntary conversions and it notes that although ASC 605-40 "provides specific guidance for gains and losses resulting from involuntary conversions, the majority of other guidance for gains and losses is included in the Derecognition Section of the relevant asset or liability Topic." That relevant topic is ASC 310-10, Receivables. But I didn't read anything specific to your situation in that topic so personally, I would rely on ASC 605-40 because I think credit insurance is a financial guarantee insurance contract. Why do you say it is excluded?
Your asset, accounts receivable, was involuntarily converted to an expense, bad debt. Did the credit insurance proceeds result in a loss for your company or did you come out even? Insurance proceeds aren't revenue but could be income in the form of a gain. In your case, most likely you experienced a bit of a loss or received full reimbursement. My first transaction would be to remove the affected receivable from the books by crediting AR and debiting a loss account (if there is a loss) and/or an other receivable account for the amount you will be getting from the insurance company, Then when the proceeds are received, you would debit cash and credit the other receivable.
I'm hoping another CPA might weigh in and give us their thoughts.
