Corporate Financial Reporting · Property, Plant and Equipment (Ind AS 16)

Derecognition, Impairment and Compensation under Ind AS 16

Updated 11 October 2026 · Fact-checked

Under Ind AS 16, you derecognise PPE on disposal or when no future economic benefits are expected. Gain or loss = net disposal proceeds − carrying amount, taken to profit or loss, not revenue. Impairment follows Ind AS 36. Compensation from third parties is income when it becomes receivable, and replacement assets are accounted for separately.

Understand Impairment, Compensation and Derecognition

PPE does not stay on the balance sheet forever. Its carrying amount leaves the books when you sell it, give it up, or no longer expect any economic benefit from using or disposing of it. This is called derecognition.

Before that point, the asset may lose value. You do not test this under Ind AS 16. You apply Ind AS 36, which explains how to review carrying amount, find the recoverable amount (the higher of fair value less costs of disposal and value in use) and recognise or reverse an impairment loss.

If an asset is damaged, lost or given up and a third party (for example an insurer) pays compensation, Ind AS 16 treats these as separate economic events. The impairment or loss, the claim, the derecognition and the purchase of a replacement are each accounted for on their own. You never net the insurance claim against the loss, and you never reduce the cost of the new asset by the compensation.

On disposal, the gain or loss is the difference between net disposal proceeds and carrying amount. It goes to profit or loss when the asset is derecognised. Gains are not classified as revenue. There is one exception: an entity that routinely sells items it has held for rental moves them to inventories at carrying amount when they stop being rented and are held for sale. Sale proceeds then are revenue under Ind AS 115.

The date of disposal is the date the buyer obtains control, judged using Ind AS 115 on when a performance obligation is satisfied.

Key rules to remember

Gain or loss on derecognition: Gain or (loss) = Net disposal proceeds − Carrying amount; Carrying amount = cost (or revalued amount) − accumulated depreciation − accumulated impairment, up to the disposal date. Charge depreciation up to the date of disposal first.
Recoverable amount: Recoverable amount = Higher of (Fair value less costs of disposal, Value in use); Used under Ind AS 36. If carrying amount exceeds recoverable amount, the excess is the impairment loss.
When to derecognise: Derecognise on (a) disposal, or (b) when no future economic benefits are expected from use or disposal; Disposal includes sale, finance lease or donation. Date of disposal is when the recipient obtains control.
Compensation from third parties: Include in profit or loss when it becomes receivable; Applies to items impaired, lost or given up. Account for it separately from the impairment, derecognition and replacement cost.
Rental assets held for sale: Transfer to inventories at carrying amount; sale proceeds = revenue (Ind AS 115); Only for entities that routinely sell PPE held for rental in the ordinary course. Ind AS 105 does not apply to these.

How to solve Impairment, Compensation and Derecognition questions

Use this order for any question on impairment, compensation or disposal of PPE.

1Identify each separate event in the question: impairment, loss or destruction, insurance claim, disposal, and replacement purchase.
2Bring depreciation up to the date of the event or disposal to get the correct carrying amount. Deduct any accumulated impairment.
3If impairment is involved, compare carrying amount with recoverable amount (higher of fair value less costs of disposal and value in use) as per Ind AS 36.
4On disposal, compute net disposal proceeds (sale price less costs of disposal) and then gain or loss = net proceeds − carrying amount.
5Treat compensation as a separate item. Recognise it in profit or loss when it becomes receivable, not when cash is received.
6Record a replacement asset at its own cost under Ind AS 16. Do not adjust it for the loss or the compensation.
7Check the exception: if the asset was held for rental and routinely sold, move it to inventories and show proceeds as revenue.
8Present the answer as journal entries or a profit or loss extract, and state the final gain or loss clearly.

Quickest way: Four-line disposal and compensation check

When to use it: Use in MCQs and short numerical questions where you must find the profit or loss impact quickly.

Line 1: Carrying amount at the event date = cost − depreciation to that date − impairment.
Line 2: Gain or loss on derecognition = net proceeds − line 1. A destroyed asset has nil proceeds, so the whole carrying amount is a loss.
Line 3: Compensation receivable is a separate income item. Add it to profit or loss without netting against line 2.
Line 4: The replacement asset goes in at its own cost. Net profit effect = line 2 + line 3.

Common mistakes in Impairment, Compensation and Derecognition

Netting insurance compensation against the loss or against the cost of the replacement asset.
It feels natural to see the claim as recovering the loss.
Fix: Ind AS 16 says these are separate economic events. Show the loss, the compensation income and the replacement asset's cost separately.
Recognising compensation when cash is received.
Students follow the cash basis they know from day-to-day practice.
Fix: Recognise it in profit or loss when it becomes receivable, that is, when the claim is established as receivable.
Forgetting depreciation up to the date of disposal.
The question gives the opening balance and the sale date mid-year, and students use the opening carrying amount.
Fix: Always charge depreciation for the part of the year up to disposal before computing gain or loss.
Showing gain on disposal as revenue.
Sale proceeds look like sales income.
Fix: Gains from derecognition of PPE are not revenue. Show them in profit or loss as other income or gain. The only exception is routine sale of assets previously held for rental, after transfer to inventories.
Applying Ind AS 16 to measure impairment.
The asset is PPE, so students assume the PPE standard decides the loss.
Fix: Impairment of PPE is determined under Ind AS 36, using recoverable amount. Ind AS 16 only points you there.
Using gross sale price instead of net disposal proceeds.
Disposal costs such as brokerage or dismantling are given in the question but overlooked.
Fix: Deduct costs of disposal from the sale price before comparing with carrying amount.

Worked examples

Example 1

Sundaram Textiles Ltd bought a machine on 1 April 2023 for ₹20,00,000. Useful life is 10 years, residual value nil, straight-line depreciation. On 1 October 2026 the machine was sold for ₹14,00,000, and the company paid ₹20,000 as dismantling and brokerage costs. Compute the gain or loss on derecognition.

Show the solution

Annual depreciation = ₹20,00,000 ÷ 10 = ₹2,00,000.
Period from 1 April 2023 to 1 October 2026 = 3.5 years.
Accumulated depreciation = ₹2,00,000 × 3.5 = ₹7,00,000.
Carrying amount at 1 October 2026 = ₹20,00,000 − ₹7,00,000 = ₹13,00,000.
Net disposal proceeds = ₹14,00,000 − ₹20,000 = ₹13,80,000.
Gain = ₹13,80,000 − ₹13,00,000 = ₹80,000.
The gain goes to profit or loss on derecognition and is not shown as revenue.

Answer: Gain on derecognition = ₹80,000, recognised in profit or loss.

Example 2

Kaveri Industries Ltd owns a plant with a carrying amount of ₹50,00,000 on 1 January 2027 after depreciation to that date. A fire destroys the plant on that day. The insurer accepts a claim of ₹38,00,000 on 20 January 2027, so it becomes receivable then. The company buys a replacement plant on 1 March 2027 for ₹60,00,000. Show the accounting under Ind AS 16 for the year ended 31 March 2027, ignoring depreciation on the new plant.

Show the solution

Treat the loss, the claim and the replacement as three separate events.
Event 1, derecognition: the plant is destroyed and no benefits are expected, so derecognise the carrying amount of ₹50,00,000. Proceeds are nil, so the loss is ₹50,00,000, charged to profit or loss.
Event 2, compensation: the claim of ₹38,00,000 became receivable on 20 January 2027, so recognise ₹38,00,000 in profit or loss in this year. It is not set off against the loss in the plant account or deducted from the new plant's cost.
Event 3, replacement: recognise the new plant at its cost of ₹60,00,000 under Ind AS 16.
Net effect on profit or loss = −₹50,00,000 + ₹38,00,000 = −₹12,00,000.
Disclose the compensation included in profit or loss if it is not shown separately in the statement of profit and loss.

Answer: Loss on derecognition ₹50,00,000 and compensation income ₹38,00,000 (net charge ₹12,00,000). New plant is recorded at ₹60,00,000.

Exam tips

In case-based MCQs, look for the words 'insurance claim', 'destroyed' or 'compensation'. The expected answer usually keeps loss, claim and replacement separate.
Always compute carrying amount to the exact disposal date. Examiners often give a mid-year sale date to test the depreciation step.
Write a one-line reason in written answers, for example 'separate economic events under Ind AS 16', so you earn marks for the principle even if arithmetic slips.
For impairment questions, state that Ind AS 36 applies and show recoverable amount as the higher of the two measures before computing loss.
Remember the disclosure point: compensation included in profit or loss must be disclosed if it is not shown separately in the statement of profit and loss.

Practice questions from Property, Plant and Equipment (Ind AS 16)

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 is PPE derecognised under Ind AS 16?

You derecognise the carrying amount on disposal or when no future economic benefits are expected from its use or disposal. Disposal can be by sale, finance lease or donation. The date is when the recipient obtains control.

How is gain or loss on disposal of PPE calculated?

It is the difference between net disposal proceeds and the carrying amount of the item. It is included in profit or loss when the item is derecognised. Gains are not classified as revenue.

When is compensation from a third party recognised?

Compensation for PPE that was impaired, lost or given up is included in profit or loss when it becomes receivable. It is accounted for separately from the impairment, derecognition and any replacement asset.

Which standard decides whether PPE is impaired?

Ind AS 36 Impairment of Assets. Ind AS 16 only refers you to it. Ind AS 36 explains how to review carrying amounts, measure recoverable amount and recognise or reverse impairment loss.