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Derecognition means that items of non-current assets such as property, plant and
equipment which were recognised as assets of the business entity are removed from
accounting records. The carrying value of a non-current asset is derecognised when the
asset is disposed of or when no future economic benefits are expected from the asset.
In case a PPE is disposed of for a consideration or price, it can result into gain or loss.
The gain or loss is simply obtained by taking the difference between the net proceeds
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from the PPE and the carrying value (net book value) of an asset at the time of disposal.

Exercise 7.5

1. Sale of the Property, Plant and Equipment is one of the scenarios which necessitate
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derecognition of asset from the books of accounts. Explain other scenarios that
may cause the Property, Plant and Equipment asset to be derecognised from the
books of accounts.
2. Sungura Corporation, a manufacturing company, is considering disposing some
of its outdated machinery to upgrade its production facilities.
Required: Explain what are the factors which should be considered in deciding
whether the machinery should be disposed or not?

Accounting for disposal of property, plant and equipment

When a Property, Plant and Equipment (PPE) is disposed of, a disposal account is opened.
The account is used to record all entries related to the disposal (or sale) of an asset.
The account is also used to determine profit or loss on the disposal. When the PPE is
disposed through sale, the accounting treatment will involve two main steps, which are:

(a) removal of the existing records associated with the asset from books of accounts;
and
(b) calculating profit or loss from the disposal.
The calculation of profit or loss from the disposal of an asset is very important because
it is unlikely that, the asset will be disposed of (through sale) at the value that is equal
to its carrying value. The amount of profit or loss from the disposal of a PPE is included
in the statement of profit or loss and other comprehensive income. Similarly, the firm
is required to establish whether there is profit or loss when the PPE is disposed through
a part exchange deal. Part exchange deal is an agreement that facilitates the seller of
a new asset to accept the old asset from the buyer as part of the payment of the new
asset. For instance, the seller of the new cars or vans accepts an old asset as part of the
considerations on the sale of a new car or van to the customer. In this case, organisation
recognises the value of the new asset and derecognises the carrying amount of the old
asset given out.

Student’s Book Form Five
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