LOS J requires us to:
explain the derecognition of property, plant, and equipment, and intangible assets.
a. An asset should be de-recognized and removed from the financial statements, if:
i. the asset is disposed of, or
ii. it is not expected to provide any future benefits.
b. If the asset is sold, the gain or loss on sale of the asset equals the sale proceeds minus its carrying cost (i.e. the historical cost as reduced by accumulated depreciation). Following would be the impact on the financial statements:
i. Gain or loss on disposal of an asset is credited or debited (respectively) in the income statement.
ii. Sale proceeds enter the cash flow statement under ‘cash from investing activities’.
iii. The carrying cost of the asset is removed from the balance sheet.
c. If the asset is disposed of through any other treatment other than sale, for example through abandonment, exchange or spin-off, etc., then it is reclassified as ‘held for use until disposal’ and it is continued to be depreciated. Different disposal mechanism for such assets are:
i. When an asset is retired or abandoned, it is reduced by its carrying amount from the balance sheet, and the loss on retirement is recorded on the income statement.
ii. When an asset is exchanged, the same treatment, as discussed in the case of acquisition of asset through the exchange, is provided.
iii. And when there is a spin-off, and the company that doesn’t want to use its assets transfers it to its other unit or subsidiary, then the following treatment is provided:
# A unit of the company is separated into a new entity.
# The shareholders of the parent company receive the proportional shares of the new company or subsidiary.
# All the assets that are received by the new company are removed from the balance sheet of the parent company.