IAS 16 – Property, Plant and Equipment

7 Derecognition of asset

Carrying amount of an item of property, plant and equipment shall be derecognized:

1. disposal (such as sales)
2. When no future benefits are expected from its use or sale i.e. scrap

Gain or loss arising from derecognition shall be included in profit and loss account in the period such derecognition occurred. Gain cannot be classified as revenue. Gain or loss will be calculated as the difference between the net disposal proceeds and the carrying amount of an asset.

However, if entity is in a rental business and also routinely sells such assets and this is its normal course of business then if entity stop using it for rental to others then it will be classified as an inventory and on derecognition (disposal or scrap) the proceeds from such sale shall be recognized as revenue.

Revaluation surplus (if any) in respect of Property, Plant and Equipment may be transferred to retained earnings at the time of derecognition. Transfers from revaluation reserve to retained earnings are NOT made through Income Statement.

Disposal can occur in the shape of:

1. Sale
2. Lease
3. Donation
4. Any event requiring derecognition e.g. theft or natural loss

The disposal amount of the asset is initially recognized at fair value. If consideration is delayed then present value will be calculated and the sum of present value(s) against the total payable will be treated as interest revenue.

Revaluation on disposal is transferred to equity and not to comprehensive income.

If that is compensated by third party then carrying amount of asset and the compensation received should be transferred to income statement separately