115 CFA
File: - Financial Analysis - Reading 26 - 6. Derecognition

6. Derecognition

j. explain the derecognition of property, plant, and equipment and intangible assets;

k. explain and evaluate how impairment, revaluation, and derecognition of property, plant, and equipment and intangible assets affect financial statements and ratios;

For accounting purposes, what are the three different ways that an asset may be disposed of?
1. Sold for cash
2. Exchanged for another asset
3. Abandoned

What happens when a company sells an asset for a price that is above (or below) its book value (original cost minus accumulated depreciation)?
The sale of a plant asset at a price above or below book value results in a gain or loss to be reported in the income statement.

When disposing of an asset, what are the four entries into the books?
1. eliminate the cost of the asset from the books.
2. eliminate the accumulated depreciation from the books.
3. record the proceeds on the sale. This is reported as cash from investing activities on the statement of cash flows.
4. record the profit or loss on the sale (if applicable). This amount is excluded from net income when the indirect method is used to calculate cash flows from operating activities.

  • CFA