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Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council.

Content

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Property, plant and equipment - compensation for the impairment or loss of items

Paragraph 11 of IAS 1 (revised 1997), presentation of financial statements, requires that financial statements should not be described as complying with International Accounting Standards unless they comply with all the requirements of each applicable standard and each applicable interpretation issued by the Standing Interpretations Committee. SIC interpretations are not intended to apply to immaterial items.

Reference: IAS 16, property, plant and equipment (revised 1998).

Issue

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. IAS 16 (revised 1998) does not give explicit guidance on how to account for such monetary or non-monetary compensation.

2. Examples of such cases may include:

(a) 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;

(b) 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;

(c) 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

(d) physical replacement in whole or in part of an impaired or lost asset.

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

(a) impairments or losses of items of property, plant and equipment;

(b) related compensation from third parties, and

(c) subsequent restoration, purchase or construction of assets.

Consensus

4. 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:

(a) impairments of items of property, plant and equipment should be recognised under IAS 36; the retirement or disposal of items of property, plant and equipment should be recognised under IAS 16 (revised 1998);

(b) 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

(c) the cost of assets restored, purchased, constructed as a replacement, or received as compensation should be determined and presented under IAS 16 (revised 1998).

Disclosure

5. Monetary or non-monetary compensation recognised for the impairment or loss of items of property, plant and equipment should be disclosed separately.

Date of consensus: June 1998.

Effective date: this interpretation becomes effective for annual financial periods beginning on or after 1 July 1999; earlier application is encouraged. Changes in accounting policies should be accounted for according to the transition requirements of IAS 8.46.

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