Accounting For Damage To An Integrated Factory Under Construction

Under Ind AS 16 and Ind AS 36, damage to an asset under construction and its subsequent reinstatement are treated as separate economic events that cannot be netted off or automatically capitalised into Capital Work-in-Progress.

Accounting requires a four-step evaluation:

1.  Derecognise the lost asset’s carrying amount immediately as a P&L expense.
2. Test remaining assets for impairment under Ind AS 36.
3. Capitalise reconstruction costs if directly attributable, while expensing abnormal wastage to P&L.
4. Recognise insurance compensation separately in P&L when receivable.

These principles apply even to integrated or turnkey projects.

BACKGROUND AND CORE ISSUE

When a company constructs a large integrated manufacturing facility and an unforeseen incident destroys an individual unit of the integral plant before commercial production begins, the fundamental accounting question arises: Is the destruction merely another construction cost to be accumulated in Capital Work-in-Progress (CWIP), or does it constitute a separate economic event requiring independe