What it means
Requisition is a power held by governments to take over private assets when the public interest demands it. Typical examples include vehicles, ships, buildings, land and equipment taken for defence, emergency response or national infrastructure.
Requisition can be permanent, in which case ownership passes to the state, or temporary, in which case the owner keeps title but loses the use of the asset for a period. The legal route and the compensation rules are set by each country's law, so the owner should take legal advice.
For a business, the accounting question is whether it has lost control of the asset. If ownership has passed, the asset is removed from the books, any compensation is recorded and the difference between compensation and carrying value (the figure at which the asset is shown on the balance sheet) is a gain or a loss.
If the requisition is temporary, the asset stays on the books and may still be depreciated, but the owner should test for impairment and recognise any compensation for lost use as income when it is receivable. Insurance may not respond, because many policies exclude acts of government.
Tax treatment can be different from the accounting treatment. In some jurisdictions, relief from tax on a gain is allowed if the compensation is reinvested in a replacement asset within a set period, so owners should speak to a tax adviser before accepting a settlement.
The cash flow side is often the hardest. Compensation can be slow to arrive and may be based on a valuation that the owner disputes, while the business still has loan repayments and staff to pay.
In practice
Real-world examples.
Example
A shipping line has a vessel requisitioned by a government during an emergency. The company removes the ship from its fixed assets once control passes, records the compensation due and discloses the event in its accounts. The notes describe what was taken, the compensation expected and any dispute over value, so lenders understand the position.
Example
A manufacturer's land is acquired for a new railway line. The finance director records the compensation as a receivable once it is agreed and works with the tax adviser on whether the gain can be deferred by reinvesting in new premises. A replacement site is shortlisted before the deadline for reinvestment expires.
Example
A construction firm's heavy equipment is taken for use in flood relief for three months. The firm keeps the machines on its books, receives a daily payment for their use and tracks any damage so that it can claim for repairs. A site manager photographs each machine before it leaves and again when it returns.
Formula
Calculation
Gain or loss on requisition = compensation received or receivable - carrying amount of the asset.
Suppose a logistics company has a warehouse with a carrying amount of $800,000 that is compulsorily acquired for a road project. The government offers compensation of $950,000. The gain = 950,000 - 800,000 = $150,000. If the compensation were only $700,000, the result would be a loss of 800,000 - 700,000 = $100,000.Case study
Seen in the real world.
Oakridge Haulage is an illustrative, fictional trucking company that operated a fleet of 40 trucks. In a national emergency, the authorities requisitioned ten of them for six months.
The finance manager treated the arrangement as a temporary loss of use. The trucks stayed in the fixed asset register, and the daily compensation of $150 per truck, or $270,000 in total over 180 days, was recorded as other income, since it was less than the $400,000 of normal profit those trucks would have earned.
Oakridge disclosed the shortfall in its notes and negotiated with the authorities over the repair of damage. When the trucks came back, a joint inspection recorded their condition and mileage, which allowed Oakridge to claim $22,000 for wear above normal. The illustrative lesson is that requisition is a legal and accounting event that needs prompt documentation of values, dates and condition.
Watch out
Common mistakes.
- Assuming requisition always means the owner loses title, when many requisitions are temporary and the asset returns.
- Recording expected compensation as certain income before the amount and the right to receive it are agreed.
- Assuming insurance will cover the loss, when many policies exclude government seizure or confiscation.
Questions
People also ask.
Is compensation always paid for requisitioned property?
In most legal systems the owner has a right to compensation, but the basis and speed differ, and some emergency powers limit what can be claimed.
Should a requisitioned asset still be depreciated?
If the owner keeps title and control returns, depreciation usually continues, but the asset should be reviewed for impairment.
How do I prove the value of a requisitioned asset?
Keep records such as purchase invoices, independent valuations, maintenance logs and photographs, which support the claim for fair compensation, and consider commissioning an independent valuation at the time of the taking, because values are harder to establish later.
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