Accounting Standards

Property, Plant and Equipment - Compensation for the Impairment or Loss of Items

Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.

Reference: FRS 16, Property, Plant and Equipment

1. Enterprises may receive monetary or non-monetary compensation from third parties for the impairment or loss of items of property, plant and equipment. Often the monetary compensation received has to be used for compelling economic reasons to restore impaired assets or to purchase or construct new assets in order to replace the assets lost or given up. FRS 16 does not give explicit guidance on how to account for such monetary or non-monetary compensation.


2. Examples of such cases may include:
   1. reimbursement by insurance companies after an impairment or loss of items of property, plant and equipment, for example, due to natural disasters, theft or mishandling;
      
      
   2. indemnities by the government for items of property, plant and equipment that were expropriated, for example, land that has to be used for public purposes;
      
      
   3. compensation related to the involuntary conversion of items of property, plant and equipment, for example, relocation of facilities from a designated urban area to a non-urban area in accordance with a national land policy; or
      
      
   4. physical replacement in whole or in part of an impaired or lost asset.



3. The issue is how an enterprise should account for:
   

   1. impairments or losses of items of property, plant and equipment;
      
      
   2. related compensation from third parties, and
      
      
   3. subsequent restoration, purchase or construction of assets.

Impairments or losses of items of property, plant and equipment, related claims for or payments of compensation from third parties and any subsequent purchase or construction of replacement assets are separate economic events and should be accounted for as such. The three economic events should be accounted for separately as follows:

1. impairments of items of property, plant and equipment should be recognised under FRS 36; the retirement or disposal of items of property, plant and equipment should be recognised under FRS 16;
   
   
2. monetary or non-monetary compensation from third parties for items of property, plant and equipment that were impaired, lost or given up should be included in the income statement when recognised; and
   
   
3. the cost of assets restored, purchased, constructed as a replacement, or received as compensation should be determined and presented under FRS 16.

Paragraph 88 of the FRS Framework states: "income is recognised in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably". The same rationale applies to compensation receivable from third parties by an enterprise for the restoration or replacement of items of property, plant and equipment that were impaired, lost or given up in the past.

Effective Date: INT FRS 14 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40.