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Financial Reporting · Ind AS 16 Property, Plant and Equipment

Ind AS 16: Impairment, Compensation and Derecognition

Updated 5 October 2026 · Fact-checked

Under Ind AS 16, you derecognise an item of PPE on disposal or when no future economic benefits are expected from its use or disposal. Gain or loss equals net disposal proceeds minus carrying amount, taken to profit or loss. Compensation from third parties for impaired, lost or given-up items is recognised in profit or loss when it becomes receivable.

Understand Impairment, Compensation and Derecognition

An item of PPE stays on the balance sheet until you derecognise it. Ind AS 16 requires derecognition in two situations: when you dispose of it (sale, or entering a finance lease as lessor, or donation), or when no future economic benefits are expected from its use or disposal. Retiring an item from active use does not by itself remove it from the books.

On derecognition you compute the gain or loss as the difference between the net disposal proceeds and the carrying amount. Carrying amount means cost (or revalued amount) less accumulated depreciation and accumulated impairment losses, measured up to the date of disposal. So you must first charge depreciation up to the date of sale. The gain or loss goes to profit or loss. Gains are not classified as revenue.

The date of disposal is when the buyer obtains control, as per the requirements for determining when a performance obligation is satisfied in Ind AS 115. Consideration is measured as per the transaction price rules of Ind AS 115. If payment is deferred, the consideration is recognised at the cash price equivalent, and the difference is interest income over the credit period.

If you replace a part of an item, you capitalise the cost of the new part if the recognition criteria are met, and you derecognise the carrying amount of the replaced part. This applies whether or not the replaced part was depreciated separately. If the carrying amount of the old part cannot be determined, the cost of the replacement may be used as an indication of what the replaced part cost when it was acquired or constructed.

Impairment, loss and compensation are separate events. Impairment is tested under Ind AS 36. Compensation from third parties for items that were impaired, lost or given up is included in profit or loss when the compensation becomes receivable. Any purchase or construction of replacement assets is a separate event and is accounted for at cost. Also, an item held for sale is not under Ind AS 16: it moves to Ind AS 105 and stops being depreciated.

Key rules to remember

Gain or loss on derecognition
Gain / (Loss) = Net disposal proceeds − Carrying amount
Carrying amount is after depreciation up to the date of disposal and after accumulated impairment. Recognise in profit or loss, not as revenue.
Carrying amount (cost model)
Carrying amount = Cost − Accumulated depreciation − Accumulated impairment loss
Under the revaluation model, start from the revalued amount instead of cost.
Replaced part
New carrying amount of item = Old carrying amount + Cost of new part − Carrying amount of replaced part
Capitalise only if recognition criteria are met. Derecognise the old part even if it was not depreciated separately.
Derecognition triggers
Derecognise on (a) disposal or (b) no future economic benefits from use or disposal
Temporary idling or retirement from active use alone does not trigger derecognition.
Third-party compensation
Recognise compensation in profit or loss when it becomes receivable
Do not net it against the impairment loss or the cost of any replacement asset.
Revaluation surplus on disposal
Revaluation surplus may be transferred directly to retained earnings on derecognition
The transfer is permitted, not mandatory. If made, it goes directly to retained earnings and not through profit or loss.

How to solve Impairment, Compensation and Derecognition questions

Use this order for any question on disposal, retirement, compensation or replaced parts.

  1. 1Identify the event: sale, retirement, loss or damage, impairment, or replacement of a part. Decide whether Ind AS 16, Ind AS 36 or Ind AS 105 applies.
  2. 2Check whether the asset is classified as held for sale. If yes, stop depreciation and measure under Ind AS 105. If not, continue under Ind AS 16.
  3. 3Charge depreciation up to the date of disposal, using the existing method and useful life. Update accumulated depreciation.
  4. 4Compute the carrying amount: cost (or revalued amount) less accumulated depreciation less accumulated impairment.
  5. 5Compute net disposal proceeds: consideration at cash price equivalent less costs of disposal, if the question gives them.
  6. 6Find the gain or loss as proceeds minus carrying amount. Recognise it in profit or loss on the date of disposal.
  7. 7Treat compensation, insurance claims and replacement assets as separate items. Recognise compensation when receivable and capitalise replacement at its own cost.
  8. 8If a revaluation surplus exists on the asset, you may transfer it directly to retained earnings on derecognition and show the transfer in the statement of changes in equity. The transfer is permitted, not mandatory, and it is not made through profit or loss.

Quickest way: Four-line disposal working

When to use it: Use this in the exam when the question gives dates, cost, useful life and sale price, and asks for profit or loss on sale.

  1. Line 1: Depreciation to date of sale = annual depreciation × years or months used.
  2. Line 2: Carrying amount = cost − accumulated depreciation − impairment.
  3. Line 3: Net proceeds = sale price − selling costs.
  4. Line 4: Gain or loss = line 3 − line 2. A positive result is a gain and a negative result is a loss. For a replaced part, write the old part's carrying amount as a loss in the same table.

Common mistakes in Impairment, Compensation and Derecognition

  • Computing gain or loss using the carrying amount at the last balance sheet date, without depreciation up to the sale date.

    Students take the opening written-down value from the balance sheet and forget that the asset was used in the current year.

    Fix: Always charge depreciation for the part-year up to the date of disposal before finding the carrying amount.

  • Showing profit on sale of PPE as revenue.

    It is natural to link any sale with revenue.

    Fix: Gains on derecognition of PPE are not revenue. Present them as other income or a gain in profit or loss.

  • Netting insurance or third-party compensation against the impairment loss or against the cost of the replacement asset.

    The events seem linked, so students show one net figure.

    Fix: Show impairment loss, compensation receivable and replacement cost as three separate items. Compensation goes to profit or loss when receivable.

  • Not derecognising the old part when a new part is capitalised.

    Students add the new cost to the asset and leave the old part's carrying amount in the books.

    Fix: Remove the carrying amount of the replaced part and charge it as a loss, even if it was not depreciated separately.

  • Stopping depreciation when an asset is idle or retired from active use, or continuing it after the asset is classified as held for sale.

    Students assume an idle asset stops wearing out in the books, and they forget that the held-for-sale classification under Ind AS 105 is what stops depreciation.

    Fix: Depreciation continues while the asset is idle or retired from active use, unless it is fully depreciated, derecognised or classified as held for sale under Ind AS 105. Held-for-sale assets are not depreciated.

  • Taking the revaluation surplus to profit or loss when the revalued asset is sold.

    Students are unsure where the surplus goes once the asset is gone.

    Fix: The surplus may be transferred directly to retained earnings on derecognition (permitted, not mandatory). It is not taken through profit or loss.

Worked examples

Example 1

Pragati Ltd bought a machine on 1 April 2023 for ₹20,00,000 with a useful life of 10 years and nil residual value (straight-line). On 30 September 2026 it sold the machine for ₹14,50,000, incurring ₹50,000 as costs of disposal. No impairment was recognised earlier. Compute the gain or loss on derecognition for the year ended 31 March 2027.

Show the solution
  1. Annual depreciation = ₹20,00,000 ÷ 10 = ₹2,00,000.
  2. Period of use up to 30 September 2026 = 3 years 6 months (1 April 2023 to 30 September 2026).
  3. Accumulated depreciation = ₹2,00,000 × 3.5 = ₹7,00,000.
  4. Carrying amount at date of sale = ₹20,00,000 − ₹7,00,000 = ₹13,00,000.
  5. Net disposal proceeds = ₹14,50,000 − ₹50,000 = ₹14,00,000.
  6. Gain = ₹14,00,000 − ₹13,00,000 = ₹1,00,000.

Answer: Gain on derecognition of ₹1,00,000, recognised in profit or loss for FY 2026-27. Depreciation for the current year up to 30 September 2026 is ₹1,00,000 (6 months) and is charged separately. The gain is not shown as revenue.

Example 2

Sagar Ltd owns a factory building bought on 1 April 2022 for ₹50,00,000 with a 25-year life, nil residual value, of which the roof was a significant component costing ₹10,00,000 with a 10-year life. On 1 April 2026 the roof was replaced at a cost of ₹12,00,000, which meets the recognition criteria. The new roof has a 10-year life. The old roof was depreciated separately. Show the accounting on 1 April 2026.

Show the solution
  1. Cost of old roof = ₹10,00,000; depreciation per year = ₹10,00,000 ÷ 10 = ₹1,00,000.
  2. Accumulated depreciation on the old roof at 1 April 2026 (4 years) = ₹4,00,000.
  3. Carrying amount of old roof = ₹10,00,000 − ₹4,00,000 = ₹6,00,000.
  4. Derecognise the old roof: loss of ₹6,00,000 in profit or loss (no disposal proceeds).
  5. Capitalise the new roof at ₹12,00,000 and depreciate it at ₹1,20,000 per year over 10 years.
  6. Net effect on the building: carrying amount changes by ₹12,00,000 − ₹6,00,000 = ₹6,00,000 increase.

Answer: Loss on derecognition of the old roof ₹6,00,000 is charged to profit or loss. The new roof is capitalised at ₹12,00,000 and depreciated at ₹1,20,000 per year from 1 April 2026.

Exam tips

  • In a case-scenario MCQ on sale of PPE, check first whether depreciation up to the sale date is already included. Many wrong options use the opening written-down value.
  • When a question mentions fire, theft or a government acquisition with insurance or compensation, give three separate treatments: impairment or write-off, compensation when receivable, and replacement at cost.
  • For a replaced part, always show both the derecognition loss and the capitalised new cost. Marks are split between them.
  • Write the provision, facts and conclusion in descriptive answers: state the Ind AS 16 rule, apply it with numbers, then state the profit or loss effect.
  • If the question says the asset is to be sold within the next year with an active plan, pause and check Ind AS 105 before applying Ind AS 16.

Practice questions from Ind AS 16 Property, Plant and Equipment

Impairment, Compensation and Derecognition in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Impairment, Compensation and Derecognition: frequently asked questions

When do you derecognise an item of PPE under Ind AS 16?

You derecognise it on disposal, or when no future economic benefits are expected from its use or disposal. Disposal includes sale and entering into a finance lease as lessor. Simply retiring an item from use does not by itself require derecognition.

Where is the gain or loss on derecognition of PPE shown?

It is recognised in profit or loss when the item is derecognised. Gains are not classified as revenue. The amount is net disposal proceeds less the carrying amount.

How is compensation from third parties for impaired or lost PPE treated?

It is included in profit or loss when the compensation becomes receivable. It is not netted against the impairment loss. Any replacement asset is recognised separately at its own cost.

What happens to the old part when a part of PPE is replaced?

You capitalise the cost of the new part if the recognition criteria are met and derecognise the carrying amount of the old part. This applies even if the old part was not depreciated separately. If the old part's carrying amount is not known, the cost of the replacement may be used as an indication of its original cost.

Do assets retired from active use continue to be depreciated?

Yes, in general, because depreciation does not cease when the asset becomes idle or is retired from active use. It stops when the asset is fully depreciated, derecognised, or classified as held for sale under Ind AS 105. Check the facts in the question for which applies.