Derecognition of Property, Plant, and Equipment and Intangible Assets

Introduction

Derecognition of an asset occurs whenever an asset is disposed of or is not expected to provide any future benefits from either its use or disposal. As a result, the asset is removed from the financial statements.

Disposal of a long-lived operating asset is effected by selling it, exchanging it, or abandoning it.

Derecognition of Long-lived Assets

Sales of Long-lived Assets

The gain or loss on the sale of a long-lived asset (for example, property, plan, and equipment) is computed as the sales proceed less the carrying amount of the asset at the time of sale. The gain or loss is disclosed on the income statement, either as a component of other gains and losses or in a separate line item when the amount is considered to be material.

Disposal of Long-lived Assets other than by a Sale

Long-lived assets which are to be disposed of other than by a sale (for example, abandoned, exchanged for another asset, or distributed to owners in a spin-off) are classified as held for use until disposal. The long-lived assets will, therefore, continue to be depreciated and tested for impairment, unless their carrying amount is zero, as required for other long-lived assets owned by the company.

When an asset is retired or abandoned, the asset value is reduced by the carrying amount of the asset at the time of retirement or abandonment, and a loss equal to the asset’s carrying amount is recorded.

When an asset is exchanged, the carrying amount of the asset given up is removed from the balance sheet, the fair value of the asset acquired is added, and any difference between the carrying amount and the fair value is reported as a gain or loss.

In a spin-off, an entire cash generating unit of a company with all of its assets is spun-off.

Question 1

Which of the following statements is least accurate?

A. An asset that is derecognized is not expected to provide any future benefits from either its use or disposal

B. The asset value is increased by the carrying amount of an asset at the time of its retirement or abandonment

C. The gain or loss on the sale of a long-lived asset is equal to the sales proceed less the carrying amount of the asset at the time of sale.

Solution

The correct answer is B.

The asset value is reduced, not increased, by the carrying amount of an asset at the time of its retirement or abandonment. Choices A and C provide accurate statements.

Question 2

The profit/loss made out of the derecognition of a long-lived asset is reported on the income statement under:

A. Other comprehensive income.

B. A separate line item.

C. Either A or B.

Solution

The correct answer is C.

The profit/loss made out of the sale of the disposed asset is recognized in the income statement either as a separate line item or under other comprehensive income.

 

Reading 29 LOS 29j:

Explain the derecognition of property, plant, and equipment and intangible assets


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