ACCA - Financial Accounting / Disposal of non-current assets - Part 06
Derecognition of Property, Plant, and Equipment Under IAS 16
IAS 16 states that an item of property, plant, and equipment (PPE) should be removed from the financial statements, or "derecognized," when it is either disposed of or when it no longer provides future economic benefits (IAS 16, para 67). When a tangible non-current asset is derecognized, several accounting adjustments are necessary to eliminate the asset and its related accumulated depreciation from the statement of financial position and to recognize any profit or loss from the disposal.
Disposal for Cash Consideration
The disposal process involves three main steps:
1. Remove the Asset's Original Cost: The first step is to eliminate the original cost of the non-current asset from the ‘non-current asset’ account.
Debit the Disposals account
Credit the Non-current Asset Cost account
2. Remove Accumulated Depreciation: Next, remove the accumulated depreciation related to the non-current asset from the ‘accumulated depreciation’ account.
Debit the Accumulated Depreciation account
Credit the Disposals account
3. Record the Sale Proceeds: Finally, record the cash proceeds from the sale of the asset.
Debit the Bank account
Credit the Disposals account
The remaining balance in the Disposals account will represent the profit or loss from the disposal of the asset.