1.28 Query: Accounting of loss of fixed assets destroyed in fire.
1. A state government corporation is engaged in the manufacture of cotton and synthetic yarn. The company’s fixed assets are insured at reinstatement cost.
2. A portion of the utility plant of the company was damaged due to fire in the last fortnight of the year.
3. The accounting policy of the company provides that claims recoverable should be accounted for as and when quantified.
4. The quantification of the loss could not be done by the surveyor for want of prices of items required for reinstatement. The quotations/tenders have been called but quantification could not be possible till the date of approval of accounts.
5. The querist has sought the opinion of the Expert Advisory Committee on the following issues: -
(a) Whether the facts are required to be disclosed by way of a note in the financial statements:
(i) In case the loss is major, future earning capacity of the organisation has reduced till the reinstatement.
(ii) If the loss is minor, there is no effect on earning capacity of the organisation.
(b) What should be the basis for determining whether the loss is major or minor?
Opinion February 8, 1995
1. The Committee is of the view that where a fixed asset is destroyed by fire etc., in an accounting period, and the amount of insurance claim in respect thereof is not determinable with finality until a subsequent accounting period, the resultant loss would be considered as a contingent loss as per Accounting Standard (AS) 4 on ‘Contingencies and Events Occurring After the Balance Sheet Date’, issued by the Institute of Chartered Accountants of India.
2. The Committee notes paras 10, 11 and 12 of AS 4 as reproduced below:
“10. The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if:
(a) it is probable that at the date of the financial statements events subsequent thereto will confirm that (after taking into account any related probable recovery) an asset has been impaired or a liability has been incurred as at that date, and
(b) a reasonable estimate of the amount of the resulting loss can be made.
11. The existence of a contingent loss should be disclosed in the financial statements if either of the conditions in paragraph 10 is not met, unless the possibility of a loss is remote. 12. Contingent gains and benefits from contracts to the extent not executed should not be accounted for in financial statements.”
3. The Committee notes from the above, that AS 4 requires accrual of the contingent loss, if the reasonable estimate of the loss can be made. In other words, even if the final figure of the loss would be determined on completion of surveys etc., the loss should be accrued, if the amount thereof could be estimated on some other reasonable basis. The Committee is further of the view that for the purpose of making such estimate, information about the extent of loss as available from completion of surveys etc., after the balance sheet date but before the approval of the accounts, should be taken into consideration.
4. The Committee also notes clause (c) of paragraph 17 of Accounting Standard (AS) 1 on “Disclosure of Accounting Policies”, issued by the Institute of Chartered Accountants of India, which is reproduced below:
“c. Materiality
Financial statement should disclose all “material” items, i.e., items the knowledge of which might influence the decisions of the user of the financial statements.”
5. On the basis of the above, the Committee is of the following opinion, in respect of the issues raised by the querist in para 5 of the query:
(a) See para 3 above.
(b) The accounting treatment of loss of fixed assets because of fire etc., depends upon whether such loss is material or not keeping in view the consideration of materiality as per para 4 above. In other words, classification of loss as major or minor is not required. __________________________
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