Chapter 7: Impairment of Property, Plant and Equipment

Impairment of property, plant, and equipment is covered in IAS 36. If there are indicators of impairment, the recoverable amount of the asset should be determined under IAS 36. If the recoverable amount is below the asset’s carrying amount, the asset should be written down to its recoverable amount.

Compensation for impairment losses

Compensation received from third parties for the impairment of items of property, plant, and equipment is included in the income statement when it becomes receivable. Reimbursement might take several different forms:

• Reimbursement by insurance companies for damage from natural disasters, theft, or mishandling.
• Indemnities from governments for expropriation of assets or compulsory purchase of land.
• Compensation for compulsory relocation of property, plant, and equipment (for example, from an urban to a non-urban area in connection with a national land policy).
• Physical replacement, in whole or in part, of an impaired or lost asset.

Gain on replacement of insured assets Entity A carried plant and machinery in its books at C200000. The plant and machinery were destroyed in a fire. The assets were insured ‘new for old’ and were replaced by the insurance company with new machines that cost C2 million. The replacement machines were sourced by the insurance company and the entity did not receive the C2 million as cash compensation. Entity A accounts for the loss in the income statement on de-recognition of the carrying value of the plant and machinery. Entity A separately recognizes a receivable and a gain in the income statement, resulting from the insurance proceeds under IAS 37, once receipt is virtually certain. The receivable should be measured at the fair value of the assets that will be provided by the insurer.

The impairment or loss of the asset, the claims for or payment of compensation from third parties, and the subsequent purchase or construction of replacement assets are separate activities, and each is accounted for separately as follows:

• Impairments by IAS 36.
• De-recognition of the carrying amount of the asset that has been retired or disposed of.
• Monetary or non-monetary compensation from third parties is included in the income statement when receivable.
• Compensation might represent a contingent asset and should be considered under IAS 37.

The cost of assets restored, purchased, or constructed as replacements, as per the requirements for initial recognition under IAS 16.

Uncertainty of insurance recovery An asset has been destroyed in a fire and an insurance claim has been made. There is uncertainty as to whether the asset’s loss is covered by the insurance policy. The compensation is a contingent asset. However, if the insurance company accepts the claim and agrees to pay the compensation, the asset is no longer contingent and the compensation is recognized in the income statement.