DEFINITION of Abandonment
Abandonment is the act of surrendering a claim to, or interest in, a particular asset. In securities markets, abandonment is the permitted withdrawal from a forward contract that is made for the purchase of deliverable securities. For instance, in some cases an options contract may not be worthwhile or profitable to exercise, so the purchaser of the option lets it expire without being exercised.
BREAKING DOWN Abandonment
An abandonment option in a contract allows either party to leave the contract before fulfilling obligations. Neither party incurs penalties for withdrawing from the contract. For example, when a worker withdraws from an employment contract containing an abandonment clause, the employer cannot contest the resignation.
Abandonment of Business Asset
Abandonment of a business asset requires accounting for the asset’s removal on the company’s financial statements. Abandonment typically results in a loss affecting net income and is reported on the income statement. If using the indirect method when creating the cash flow statement, the section on cash flows from/used by operating activities reflects non-cash-related activities affecting net income. The loss incurred on the asset’s abandonment is included as an adjustment in that section.
An abandonment clause may be part of an insurance contract allowing the owner to abandon damaged property while still receiving a full settlement. The insurance company then owns the abandoned property. Such clauses are common in marine property insurance policies on homes at greater risk for flood or other damage from natural disasters. Policyholders may evoke the clause when recovering or repairing the property is greater than the property’s value, or the damage results in a total loss. For example, when a boat is lost at sea, recovering the boat is more expensive than replacing it with proceeds from an insurance policy.
Abandonment and Salvage
Abandonment and salvage involves one party’s relinquishment of an asset and another party’s subsequent claim to the asset. A clause allowing this action commonly appears in insurance contracts. If the owner abandons an insured asset or piece of property, the insurance company may rightfully claim the item for salvage. The owner must express in writing his intention in abandoning the asset or property. For example, if a homeowner abandons a house due to heavy flood damage, the owner provides a written notice of intentionally abandoning the home to the insurance company. The insurance company lays claim to the house and attempts to resell it. Because abandonment and salvage can be lucrative for the salvager, multiple parties may try laying claim to an abandoned asset or property.