Disposal of tangible non-current asset

This chapter explains the accounting treatment for disposals of tangible non-current assets. You’ll learn how to record disposals and part-exchange transactions in line with IFRS Accounting Standards, including how to calculate and record any gain or loss on disposal. Disclosure of PPE movements and the non-current asset register are covered in a later chapter.

Learning objectives

By the end of this chapter, you should be able to:

• Record the acquisition and disposal of tangible non-current assets in the general ledger accounts in accordance with IFRS Accounting Standards.
• Calculate and record gains or losses on disposal of tangible non-current assets in the statement of profit or loss, including part exchange transactions.

Introduction

Businesses sometimes dispose of tangible non-current assets before the end of their useful life, or at the end of their useful life when a residual value remains. Because selling non-current assets isn’t part of normal trading activities, the proceeds are treated as capital income, not business revenue.

A disposal is recorded through a disposal of non-current assets process. This process removes the asset from the accounting records and reports any resulting gain or loss in the statement of profit or loss.

Definitions

Gain on disposal of non-current asset

A gain arises when the asset’s carrying amount at the date of sale is less than the net proceeds.

Loss on disposal of non-current asset

A loss arises when the asset’s carrying amount at the date of sale is greater than the net proceeds.

A gain on disposal isn’t revenue - it’s capital income, reported separately from trading activity. Under IFRS 18, a gain or loss on disposal of property, plant and equipment used in operations is presented within the operating category of profit or loss, not as part of revenue.

If the asset being disposed of had previously been revalued, the gain or loss is measured against its revalued carrying amount rather than cost less accumulated depreciation. The revaluation model is covered in the next chapter.

Accounting for disposal of non-current asset

When a tangible non-current asset is acquired, it’s recorded in the non-current asset ledger. At each year-end, depreciation is charged to profit or loss, with the corresponding credit posted to accumulated depreciation.

When an asset is disposed of, it must be removed from the books. To do that, we transfer the asset’s cost and accumulated depreciation to a disposal of non-current asset account, record the proceeds, and then calculate the gain or loss.

Disposal steps

Upon the disposal of a tangible non-current asset:

1. Derecognise the asset, by transferring the cost from the asset account to the disposal of asset account as shown in the journal.

   Debit: Disposal of non-current asset account

   Credit: Non-current asset account

2. Derecognise the accumulated depreciation, by transferring it from the accumulated depreciation account as at the date of the sale to the disposal of asset account as shown in the journal.

   Debit: Accumulated depreciation account

   Credit: Disposal of non-current asset account

3. Record the proceeds from the disposal as shown in the journal:

   Debit: Cash or receivable account

   Credit: Disposal of non-current asset account

4. Balance off the disposal of asset accounts. There is a gain on disposal when the balancing figure is on the debit, and it is a loss on disposal when the balancing figure is on the credit.

   • When it is loss on disposal, the journal entry will be:

     Debit: Statement of profit or loss (loss on disposal)

     Credit: Disposal of non-current asset account

   • When it is a gain on disposal, the journal entry will be:

     Debit: Disposal of non-current asset account

     Credit: Statement of profit or loss (gain on disposal)

Illustration: disposal of tangible non-current asset

D&D Ltd acquired a factory plant for $100,000 on 1 January 20X0 with an estimated residual value of zero and depreciated over its useful life of 5 years. At the end of the year 3 (i.e., 31 December 20X2), D&D sold the plant for $45,000 cash. Illustrate the accounting treatment of the transaction in the financial statement.

Suggested solution:

Work through the following before checking the solution: what’s the annual depreciation, the accumulated depreciation at the disposal date, the carrying amount at the disposal date, and the gain or loss on disposal?

The calculations tell you the gain or loss, but you also need to know the journal entries that record the disposal in the general ledger. The journal to account for the disposal is shown below.

Description	Debit ($)	Credit ($)
Derecognising the factory plant cost
Disposal of asset	100,000
Factory plant		100,000
Derecognise the accumulated depreciation
Accumulated depreciation	60,000
Disposal of asset		60,000
Recognise the proceeds from the disposal
Cash and Bank	45,000
Disposal of asset		45,000
Transfer gain to profit or loss
Disposal of asset	5,000
Profit or loss		5,000

The disposal of the asset ledger account is shown below.

Disposal of asset: part exchange transactions

Sometimes, a business acquires a new non-current asset by exchanging an old one and paying an additional amount. The value assigned to the old asset in this arrangement is called the trade-in price.

In a part-exchange, the trade-in price is treated as the proceeds from disposal of the old asset. So, instead of crediting cash or receivables, you credit the trade-in value to the disposal account. The cost of the new asset (trade-in value + additional cash paid) is then debited to the non-current asset account.

Illustration: part exchange transactions

D&D Ltd acquired a factory plant for $100,000 on 1 January 20X0 with an estimated residual value of zero and depreciated over its useful life of 5 years. At the end of year 3 (i.e., 31 December 20X2), D&D traded in the plant for $30,000 for the purchase of a new asset costing $120,000.

Illustrate the accounting treatment of the transaction in the financial statement.

Suggested solution:

The step-by-step guide in the earlier illustration above should guide you to solve this question.

1. What are the journal entries to be passed for the disposal of the factory plant as well as the purchase of the new asset?

(spoiler)

Journal entries

Steps 1 and 2 - derecognising the old factory plant’s cost and its accumulated depreciation - are identical to the first illustration above: debit disposal of asset $100,000 / credit factory plant $100,000, and debit accumulated depreciation $60,000 / credit disposal of asset $60,000. This leaves a carrying amount of $40,000.

The trade-in allowance of $30,000 is less than this $40,000 carrying amount, so the disposal results in a loss: $40,000 − $30,000 = $10,000.

Description	Debit ($)	Credit ($)
Recognise the trade-in allowance as the proceeds
Trade-in allowance	30,000
Disposal of asset		30,000
Recognise the value of the new factory plant
Factory plant	120,000
Cash and bank		90,000
Trade-in allowance		30,000
Transfer loss to profit or loss
Profit or loss	10,000
Disposal of asset		10,000

The disposal of the asset ledger account is shown below.