Ias 16 : Derecognition and Disposal, Disclosure Requirements

Question 1

Derecognition, i.e. removal of the carrying amount of an item of PP&E from the financial statements of the entity, occurs when an item of PP&E is either disposed of, or when no further economic benefits are expected to flow from its use or disposal. [IAS 16.67].

The disposal of an item of PP&E may occur in a variety of ways (e.g. by sale, by entering into a finance lease or by donation).

Answer 1

Derecognition, i.e. removal of the carrying amount of an item of PP&E from the financial statements of the entity, occurs when an item of PP&E is either disposed of, or when no further economic benefits are expected to flow from its use or disposal. [IAS 16.67].

The disposal of an item of PP&E may occur in a variety of ways (e.g. by sale, by entering into a finance lease or by donation).

Question 2

IFRS 15 requires that revenue (and a gain or loss on
disposal of a non-current asset not in the ordinary course of business) be recognised upon satisfaction of performance obligation by transferring control.

Answer 2

IFRS 15 requires that revenue (and a gain or loss on
disposal of a non-current asset not in the ordinary course of business) be recognised upon satisfaction of performance obligation by transferring control.

Question 3

Accordingly, the actual date of disposal of an item of PP&E is the date the recipient obtains control of that item in accordance with the requirements for determining when a performance obligation is satisfied in IFRS 15. IFRS 16 applies to a disposal by way of a sale and leaseback. [IAS 16.69]

Answer 3

Accordingly, the actual date of disposal of an item of PP&E is the date the recipient obtains control of that item in accordance with the requirements for determining when a performance obligation is satisfied in IFRS 15. IFRS 16 applies to a disposal by way of a sale and leaseback. [IAS 16.69]

Question 4

All gains and losses on derecognition must be included in profit and loss for the period when the item is derecognised, unless another standard applies; e.g. under IFRS 16 a sale and leaseback transaction might not give rise to a gain. [IAS 16.68].

Answer 4

All gains and losses on derecognition must be included in profit and loss for the period when the item is derecognised, unless another standard applies; e.g. under IFRS 16 a sale and leaseback transaction might not give rise to a gain. [IAS 16.68].

Question 5

Gains are not to be classified as revenue, although in some limited circumstances presenting gross revenue on the sale of certain assets may be appropriate. [IAS 16.68]. Gains and losses are to be calculated as the difference between any net disposal proceeds and the carrying value of the item of PP&E. [IAS 16.71].

This means that any revaluation surplus in equity relating to the asset disposed of is transferred directly to retained earnings when the asset is derecognised and not reflected in profit or loss. [IAS 16.41].

Answer 5

Gains are not to be classified as revenue, although in some limited circumstances presenting gross revenue on the sale of certain assets may be appropriate. [IAS 16.68]. Gains and losses are to be calculated as the difference between any net disposal proceeds and the carrying value of the item of PP&E. [IAS 16.71].

This means that any revaluation surplus in equity relating to the asset disposed of is transferred directly to retained earnings when the asset is derecognised and not reflected in profit or loss. [IAS 16.41].

Question 6

Replacement of ‘parts’ of an asset requires derecognition of the carrying value of the replaced part, even if that part had not been depreciated separately. In these circumstances, the standard allows the cost of the replacement part to be a guide in estimating the original cost of the replaced part at the time it was acquired or constructed, if that cannot be determined. [IAS 16.70].

Answer 6

Replacement of ‘parts’ of an asset requires derecognition of the carrying value of the replaced part, even if that part had not been depreciated separately. In these circumstances, the standard allows the cost of the replacement part to be a guide in estimating the original cost of the replaced part at the time it was acquired or constructed, if that cannot be determined. [IAS 16.70].

Question 7

The amount of consideration to be included in the gain or loss arising from the derecognition of an item of PP&E is determined in accordance with the requirements for determining the transaction price in paragraphs 47–72 of IFRS 15. Any subsequent changes to the estimated amount of the consideration included in the gain or loss should be accounted for in accordance with the requirements for changes in the transaction price in IFRS 15. [IAS 16.72].

Answer 7

The amount of consideration to be included in the gain or loss arising from the derecognition of an item of PP&E is determined in accordance with the requirements for determining the transaction price in paragraphs 47–72 of IFRS 15. Any subsequent changes to the estimated amount of the consideration included in the gain or loss should be accounted for in accordance with the requirements for changes in the transaction price in IFRS 15. [IAS 16.72].

Question 8

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations 1

IFRS 5 introduced a category of asset, ‘held for sale’, and PP&E within this category is outside the scope of IAS 16, although IAS 16 requires certain disclosures about assets held for sale to be made

IFRS 5 requires that an item of PP&E should be classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than continuing use, though continuing use is not in itself precluded for assets classified as held for sale. [IFRS 5.6]

Answer 8

IFRS 5 introduced a category of asset, ‘held for sale’, and PP&E within this category is outside the scope of IAS 16, although IAS 16 requires certain disclosures about assets held for sale to be made

IFRS 5 requires that an item of PP&E should be classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than continuing use, though continuing use is not in itself precluded for assets classified as held for sale. [IFRS 5.6]

Question 9

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations 2

An asset can also be part of a ‘disposal group’ (that is a group of assets that are to be disposed of together), in which case such group can be treated as a whole. Once this classification has been made, depreciation ceases, even if the asset is still being used, but the assets must be carried at the lower of their previous carrying amount and fair value less costs to sell. For assets (or disposal group) to be classified as held for sale, they must be available for immediate sale in their present condition, and the sale must be highly probable. [IFRS 5.7].

Answer 9

An asset can also be part of a ‘disposal group’ (that is a group of assets that are to be disposed of together), in which case such group can be treated as a whole. Once this classification has been made, depreciation ceases, even if the asset is still being used, but the assets must be carried at the lower of their previous carrying amount and fair value less costs to sell. For assets (or disposal group) to be classified as held for sale, they must be available for immediate sale in their present condition, and the sale must be highly probable. [IFRS 5.7].

Question 10

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations 3

Additionally, the sale should be completed within one year from the date of classification as held for sale, management at an ‘appropriate level’ must be committed to the plan, and an active programme of marketing the assets at current fair value must
have been started. [IFRS 5.8].

Answer 10

Additionally, the sale should be completed within one year from the date of classification as held for sale, management at an ‘appropriate level’ must be committed to the plan, and an active programme of marketing the assets at current fair value must
have been started. [IFRS 5.8].

Question 11

Sale of assets held for rental 1

If an entity, in the course of its ordinary activities, routinely sells PP&E that it has held for rental to others, it should transfer such assets to inventories at their carrying amount when they cease to be rented and are then held for sale. The proceeds from the sale of such assets should be recognised as revenue in accordance with IFRS 15. [IAS 16.68A].
In contrast, the sale of investment property is generally not recognised as revenue.

Answer 11

If an entity, in the course of its ordinary activities, routinely sells PP&E that it has held for rental to others, it should transfer such assets to inventories at their carrying amount when they cease to be rented and are then held for sale. The proceeds from the sale of such assets should be recognised as revenue in accordance with IFRS 15. [IAS 16.68A].
In contrast, the sale of investment property is generally not recognised as revenue.

Question 12

Sale of assets held for rental 2

A number of entities sell assets that have previously been held for rental, for example, car rental companies that may acquire vehicles with the intention of holding them as rental cars for a limited period and then selling them. An issue was whether the sale of such assets, which arguably have a dual purpose of being rented out and then sold, should be presented gross (revenue and cost of sales) or net (gain or loss) in profit or loss.

Answer 12

A number of entities sell assets that have previously been held for rental, for example, car rental companies that may acquire vehicles with the intention of holding them as rental cars for a limited period and then selling them. An issue was whether the sale of such assets, which arguably have a dual purpose of being rented out and then sold, should be presented gross (revenue and cost of sales) or net (gain or loss) in profit or loss.

Question 13

Sale of assets held for rental 3

The IASB concluded that the presentation of gross revenue, rather than a net gain or loss, would better reflect the ordinary activities of some such entities and amended IAS 16 accordingly.

Answer 13

The IASB concluded that the presentation of gross revenue, rather than a net gain or loss, would better reflect the ordinary activities of some such entities and amended IAS 16 accordingly.

Question 14

Sale of assets held for rental 4

The IASB also made a consequential adjustment to IAS 7 – Statement of Cash Flows – to require that both (i) the cash payments to manufacture or acquire assets held for rental and subsequently held for sale; and (ii) the cash receipts from rentals and sales of such assets are presented as from operating activities. [IAS 7.14].

This amendment to IAS 7 is intended to avoid initial expenditure on purchases of assets being classified as
investing activities while inflows from sales are recorded within operating activities.

Answer 14

The IASB also made a consequential adjustment to IAS 7 – Statement of Cash Flows – to require that both (i) the cash payments to manufacture or acquire assets held for rental and subsequently held for sale; and (ii) the cash receipts from rentals and sales of such assets are presented as from operating activities. [IAS 7.14].

This amendment to IAS 7 is intended to avoid initial expenditure on purchases of assets being classified as
investing activities while inflows from sales are recorded within operating activities.

Question 15

Partial disposals and undivided interests 1

IAS 16 requires an entity to derecognise ‘an item’ of PP&E on disposal or when it expects no future economic benefits from its use or disposal.
[IAS 16.67].

Answer 15

IAS 16 requires an entity to derecognise ‘an item’ of PP&E on disposal or when it expects no future economic benefits from its use or disposal.
[IAS 16.67].

Question 16

Partial disposals and undivided interests 2

Items of PP&E are recognised when their costs can be measured reliably and it is probable that future benefits associated with the asset will flow to the entity.
[IAS 16.7].

The standard ‘does not prescribe the unit of measure for recognition, i.e. what constitutes an item of property, plant and equipment’. [IAS 16.9].

Answer 16

Items of PP&E are recognised when their costs can be measured reliably and it is probable that future benefits associated with the asset will flow to the entity.
[IAS 16.7].

The standard ‘does not prescribe the unit of measure for recognition, i.e. what constitutes an item of property, plant and equipment’. [IAS 16.9].

Question 17

Partial disposals and undivided interests 3

However, items that are derecognised were not necessarily items on initial recognition. The item that is being disposed of may be part of a larger ‘item’ bought in a single transaction that can be subdivided into parts (i.e. separate items) for separate disposal; an obvious example is land or many types of property. The principle is the same as for the replacement of parts, which may only be identified and derecognised so that the cost of the replacement part may be recognised. The entity needs to identify the cost of the part disposed of by allocating the carrying value on a systematic and appropriate basis.

Answer 17

However, items that are derecognised were not necessarily items on initial recognition. The item that is being disposed of may be part of a larger ‘item’ bought in a single transaction that can be subdivided into parts (i.e. separate items) for separate disposal; an obvious example is land or many types of property. The principle is the same as for the replacement of parts, which may only be identified and derecognised so that the cost of the replacement part may be recognised. The entity needs to identify the cost of the part disposed of by allocating the carrying value on a systematic and appropriate basis.

Question 18

Partial disposals and undivided interests 4

In these cases, the part disposed of is a physical part of the original asset. The standard assumes that disposal will be of a physical part (except in the specific case of major inspections and overhauls).
However, some entities enter into arrangements in which they dispose of part of the benefits that will be derived from the assets.

Answer 18

In these cases, the part disposed of is a physical part of the original asset. The standard assumes that disposal will be of a physical part (except in the specific case of major inspections and overhauls).
However, some entities enter into arrangements in which they dispose of part of the benefits that will be derived from the assets.

Question 19

Partial disposals and undivided interests 5

Although IAS 16 defines an asset by reference to the future economic benefits that will be controlled by the entity as a result of the acquisition, it does not address disposals of a proportion of these benefits. An entity may dispose of an undivided interest in the whole asset (sometimes called an ownership ‘in common’ of the asset). This means that all owners have a proportionate share of the entire asset (e.g. the purchaser of a 25% undivided interest in 100 acres of land owns 25% of the whole 100 acres). These arrangements are common in, but are not restricted to, the extractive and property sectors. Vendors have to determine how to account for the consideration they have received from the purchaser. This will depend on the details of the arrangement and, in particular, whether the entity continues to control the asset or there is joint control.

Answer 19

Although IAS 16 defines an asset by reference to the future economic benefits that will be controlled by the entity as a result of the acquisition, it does not address disposals of a proportion of these benefits. An entity may dispose of an undivided interest in the whole asset (sometimes called an ownership ‘in common’ of the asset). This means that all owners have a proportionate share of the entire asset (e.g. the purchaser of a 25% undivided interest in 100 acres of land owns 25% of the whole 100 acres). These arrangements are common in, but are not restricted to, the extractive and property sectors. Vendors have to determine how to account for the consideration they have received from the purchaser. This will depend on the details of the arrangement and, in particular, whether the entity continues to control the asset or there is joint control.

Question 20

General disclosures 1

(a) the measurement bases used for determining the gross carrying amount (e.g. cost or revaluation).        [IAS 16.73(a)]. 
When more than one basis has been used, the gross carrying amount for that basis in each category may have to be disclosed (however the standard requires that if revaluation is adopted the entire class of PP&E must be revalued);

Answer 20

(a) the measurement bases used for determining the gross carrying amount (e.g. cost or revaluation).        [IAS 16.73(a)]. 
When more than one basis has been used, the gross carrying amount for that basis in each category may have to be disclosed (however the standard requires that if revaluation is adopted the entire class of PP&E must be revalued);

Question 21

General disclosures 2

(b) the depreciation methods used. Selection of the depreciation method adopted is a matter of judgement and its disclosure provides information that allows users of financial statements to review the policies selected by management and enables them to compare with other entities.
For similar reasons, it is necessary to disclose depreciation (in item (e)(vii) below), whether recognised in profit or loss or as a part of the cost of other assets, during a period; and accumulated depreciation at the end of the period (in item (d) below); [IAS 16.73(b), 75]

Answer 21

(b) the depreciation methods used. Selection of the depreciation method adopted is a matter of judgement and its disclosure provides information that allows users of financial statements to review the policies selected by management and enables them to compare with other entities.
For similar reasons, it is necessary to disclose depreciation (in item (e)(vii) below), whether recognised in profit or loss or as a part of the cost of other assets, during a period; and accumulated depreciation at the end of the period (in item (d) below); [IAS 16.73(b), 75]

Question 22

General disclosures 3

(c) the useful lives or the depreciation rates used. Selection of the useful lives or depreciation rates used is a matter of judgement and its disclosure provides information that allows users of financial statements to review the policies selected by management and enables them to compare with other entities;
[IAS 16.73(c), 75]

Answer 22

(c) the useful lives or the depreciation rates used. Selection of the useful lives or depreciation rates used is a matter of judgement and its disclosure provides information that allows users of financial statements to review the policies selected by management and enables them to compare with other entities;
[IAS 16.73(c), 75]

Question 23

General disclosures 4

(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period;
[IAS 16.73(d)]

Answer 23

(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period;
[IAS 16.73(d)]

Question 24

General disclosures 5

(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) disposals, and assets classified as held for sale or included in a disposal group held for sale in accordance with IFRS 5;
(iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations and from impairment losses recognised or reversed directly in other comprehensive income under IAS 36;
(v) impairment losses recognised in profit or loss during the period under IAS 36;
(vi) impairment losses reversed in profit or loss during the period under IAS 36;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and
(ix) other changes.
[IAS 16.73(e)]

Answer 24

(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) disposals, and assets classified as held for sale or included in a disposal group held for sale in accordance with IFRS 5;
(iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations and from impairment losses recognised or reversed directly in other comprehensive income under IAS 36;
(v) impairment losses recognised in profit or loss during the period under IAS 36;
(vi) impairment losses reversed in profit or loss during the period under IAS 36;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and
(ix) other changes.
[IAS 16.73(e)]

Question 25

General disclosures 6

IAS 16 also requires the disclosure of the following information, which is useful to gain a fuller understanding of the entire position of the entity’s holdings of and its commitments to purchase property plant and equipment:

(a) the existence and amounts of restrictions on title, and PP&E pledged as security for liabilities;
(b) the amount of expenditures recognised in the carrying amount of an item of PP&E in the course of construction;
(c) the amount of contractual commitments for the acquisition of PP&E; and
(d) if it is not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for items of PP&E that were impaired, lost or given up that is included in profit or loss.
[IAS 16.74].

Answer 25

IAS 16 also requires the disclosure of the following information, which is useful to gain a fuller understanding of the entire position of the entity’s holdings of and its commitments to purchase property plant and equipment:

(a) the existence and amounts of restrictions on title, and PP&E pledged as security for liabilities;
(b) the amount of expenditures recognised in the carrying amount of an item of PP&E in the course of construction;
(c) the amount of contractual commitments for the acquisition of PP&E; and
(d) if it is not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for items of PP&E that were impaired, lost or given up that is included in profit or loss.
[IAS 16.74].

Question 26

Additional disclosures for revalued assets 1

In addition to the disclosures required by IFRS 13, the disclosure requirements in IAS 16 if the revaluation method is adopted are:

(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) for each revalued class of PP&E, the carrying amount that would have been recognised had the assets been carried under the cost model; and
(d) the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders. [IAS 16.77].

Answer 26

In addition to the disclosures required by IFRS 13, the disclosure requirements in IAS 16 if the revaluation method is adopted are:

(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) for each revalued class of PP&E, the carrying amount that would have been recognised had the assets been carried under the cost model; and
(d) the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders. [IAS 16.77].

Question 27

Additional disclosures for revalued assets 2

In particular the requirement under (c) is quite onerous for entities, as it entails their keeping asset register information in some detail in order to meet it.

Answer 27

In particular the requirement under (c) is quite onerous for entities, as it entails their keeping asset register information in some detail in order to meet it.