Compensation from third parties

Learning objectives

• Recognise compensation from third parties when it becomes receivable.L2, L3
• Calculate, from the case data, the amount relating to compensation from third parties and justify the basis of calculation.L2, L3
• Record the entry relating to compensation from third parties and state its effect on the financial statements.L2, L3

Normative references

• IAS 40 §72Compensation from third parties for investment property that was impaired, lost or given up: recognised in profit or loss when the compensation becomes receivable.
• IAS 40 §73Impairments or losses of investment property, related compensation from third parties and the subsequent purchase or construction of replacement assets are separate economic events, accounted for separately: impairment under IAS 36, retirement or disposal under paras. 66 to 71, compensation in profit or loss when it becomes receivable, and the cost of replacement assets under paras. 20 to 29.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• An investment property is damaged by a third party, which must pay compensation. When is the compensation recognised in profit or loss?L2
• A fire caused by a contractor destroys an investment property of Rovane, carried at {related_carrying_amount} and derecognised. The contractor's insurer acknowledges owing compensation of {compensation_receivable}, which became receivable during the period (case facts). Calculate the compensation income recognised and the net effect on profit or loss, the loss on the property being recognised separately.L3
• The court recognises that Salvane is entitled to compensation of {compensation_receivable} owed by a third party that damaged its investment property. The compensation becomes receivable today (case data). Record the corresponding entry, the loss on the property being recognised elsewhere.L3