Compensation from third parties for the impairment, loss or other disposal of investment property is recognised in the income statement as it becomes receivable.

The impairment or loss of assets, claims for compensation relating to those impairments or losses, and the subsequent purchase or construction of replacement assets are separate economic events and are accounted for separately. The effects of the separate economic events are not combined for the purpose of recognition and disclosure. Therefore, they are accounted for as follows:

• Impairments are recognised in accordance with IAS 36.

• Compensation from third parties is recognised in the income statement when it becomes receivable.
• The cost of restoring assets and of purchasing or constructing replacement assets is determined and recognised as investment property in accordance with the recognition and measurement rules in IAS 40.

Compensation from third party An investment property with a carrying amount of C1m is destroyed by fire in 20X1. The buildings element of the property was carried at C300,000. A claim for compensation is made to the entity’s insurers, but has not been agreed at the time that the financial statements for 20X1 are issued. The claim is agreed in 20X2 and the entity receives C500,000 in compensation. A replacement building is also constructed at a cost of C400,000 in 20X2. The entity recognises an impairment loss of C300,000 in 20X1 in respect of the loss of the building. The land element is not impaired, but the entity would continue to account for that element as investment property. The insurance claim has not been accepted by the insurers at the end of 20X1 and so no compensation is receivable and none can be recognised. The receipt of the compensation is not virtually certain at that time. In 20X2, compensation of C500,000 is receivable and so is recognised in the income statement for that year. The compensation cannot be offset against the cost of the replacement building. Instead, the cost of the replacement building of C400,000 is capitalised and added to the carrying amount of the investment property. Overall, the income statement for the two years has shown a net gain of C200,000 (compensation of C500,000 less the impairment of C300,000). It would not have been acceptable to net the impairment and the compensation and disclose only a gain of C200,000, even if the compensation had been receivable in 20X1. IAS 40 requires each of the two economic events to be accounted for separately.

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Insurance claim – example A building carried as an investment property burns down during the reporting period. A valuation of the building in its damaged state is performed at the end of the reporting period. The amount receivable from insurance should be recognised separately in the statement of financial position at the end of the reporting period if it meets the relevant recognition criteria. Any valuation of the property recognised as an investment property should not include the insurance receivable.

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