When should a disposal be recorded and how is it calculated?

When should a disposal be recorded and how is it calculated?

• A. An item of PPE should be removed from the SOFP when the asset is permanently withdrawn from use, and disposal gain or loss is net disposal proceeds minus carrying amount
• B. An item of PPE should be removed only when sold, with disposal recorded as proceeds minus fair value
• C. Disposal is recorded only if there is a cash inflow; otherwise not
• D. Disposal is recorded when impairment is detected

Answer: (A)

When an asset is disposed of or permanently withdrawn from use, you derecognise it from PPE and remove its carrying amount from the balance sheet. Any difference between what you receive (net disposal proceeds, i.e., proceeds net of selling costs) and the asset’s carrying amount is recorded in profit or loss as a disposal gain or disposal loss. If the disposal proceeds exceed the carrying amount, you show a gain; if they are less, you show a loss. Even if there are no cash proceeds (for example, the asset is scrapped), you still derecognise it and record a loss equal to the carrying amount. This is why the correct approach is to remove the asset when it is permanently withdrawn from use and to recognise disposal gains or losses as net disposal proceeds minus the carrying amount.

When an asset is disposed of or permanently withdrawn from use, you derecognise it from PPE and remove its carrying amount from the balance sheet. Any difference between what you receive (net disposal proceeds, i.e., proceeds net of selling costs) and the asset’s carrying amount is recorded in profit or loss as a disposal gain or disposal loss. If the disposal proceeds exceed the carrying amount, you show a gain; if they are less, you show a loss. Even if there are no cash proceeds (for example, the asset is scrapped), you still derecognise it and record a loss equal to the carrying amount. This is why the correct approach is to remove the asset when it is permanently withdrawn from use and to recognise disposal gains or losses as net disposal proceeds minus the carrying amount.