The accounting treatment for the derecognition, retirement, and disposal of Property, Plant, and Equipment (PPE) is governed by Accounting Standard (AS) 10. This standard outlines the necessary steps and principles to ensure accurate financial reporting when an entity disposes of or ceases to use its PPE. The standard provides guidance on retirement, derecognition, measurement of disposal proceeds, gain or loss recognition, and the necessary presentation and disclosure in financial statements.
The accounting treatment for the disposal of PPE (AS 10)
1. Retirement and Disposal:
Items of PPE retired from active use and held for disposal should be stated at the lower of their carrying amount and net realizable value.
Any write-down should be recognized immediately in the Statement of Profit and Loss.
2. Derecognition:
The carrying amount of an item of PPE should be derecognized on disposal or when no future economic benefits are expected from its use or disposal.
3. Measurement of Net Disposal Proceeds:
The proceeds from the disposal of an item of PPE are measured at fair value, which is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (Net Disposal Proceeds = Fair value proceeds – Costs of disposal).
4. Gain or Loss Recognition:
Gain or loss on derecognition should be recognized in the Statement of Profit and Loss (unless AS 19 requires otherwise in a sale and leaseback transaction).
The gain or loss on derecognition is the difference between the net disposal proceeds, if any, and the carrying amount of the derecognized item of PPE (Gain or loss = Net disposal proceeds – Carrying amount of PPE).
The gain or loss on disposal should not be classified as revenue. It is typically presented separately from revenue in the profit and loss statement to avoid distorting revenue figures.
5. Presentation and Disclosure:
The financial statements should disclose the amount of gain or loss recognized on disposal and the consideration received, along with the method used for calculating these amounts.
6. Examples
1 – Sale of PPE to outsiders
| Particulars | Case – 1 | Case – 2 |
| i. Purchase costs of PPE | 15,00,000 | 18,00,000 |
| ii. Accumulated depreciation of PPE | 5,00,000 | 9,00,000 |
| iii. Carrying amount of PPE (i – ii) | 10,00,000 | 9,00,000 |
| iv. Disposal proceeds of PPE | 12,00,000 | 8,00,000 |
| v. Gain / (Loss) on disposal of PPE (iii – iv) | 2,00,000 | (1,00,000) |
Journal Entry
| Case | Account | Dr. (₹) | Cr. (₹) |
| 1 | Cash / Bank | 12,00,000 | |
| Acc. Depreciation | 5,00,000 | ||
| 15,00,000 | |||
| To PPE | 15,00,000 | ||
| To Gain on Disposal | 2,00,000 | ||
| 2 | Cash / Bank | 8,00,000 | |
| Acc. Depreciation | 9,00,000 | ||
| Loss on Disposal | 1,00,000 | ||
| 18,00,000 | |||
| To PPE | 18,00,000 |
2 – Sale of PPE to employees
| Particulars | Case – 1 | Case – 2 |
| i. Purchase costs of PPE | 15,00,000 | 18,00,000 |
| ii. Accumulated depreciation of PPE | 5,00,000 | 9,00,000 |
| iii. Carrying amount of PPE (i – ii) | 10,00,000 | 9,00,000 |
| iv. Fair value of PPE | 12,50,000 | 9,50,000 |
| v. Disposal proceeds of PPE | 12,00,000 | 8,00,000 |
| vi. Gain / (Loss) on disposal of PPE (iii – iv) | 2,00,000 | 50,000 |
| vii. Employee benefits expenses | – | 1,50,000 |
Journal Entry
| 1 | Cash / Bank | 12,00,000 | |
| Acc. Depreciation | 5,00,000 | ||
| 15,00,000 | |||
| To PPE | 15,00,000 | ||
| To Gain on Disposal | 2,00,000 | ||
| 2 | Cash / Bank | 8,00,000 | |
| Acc. Depreciation | 9,00,000 | ||
| Employee Benefit Exp. | 1,50,000 | ||
| 18,00,000 | |||
| To PPE | 18,00,000 | ||
| To Gain on Disposal | 1,50,000 |
3 – Writing off of PPE
| Particulars | Case – 1 | Case – 2 |
| i. Purchase costs of PPE | 15,00,000 | 18,00,000 |
| ii. Accumulated depreciation of PPE | 10,00,000 | 12,00,000 |
| iii. Carrying amount of PPE (i – ii) | 5,00,000 | 6,00,000 |
| iv. Recovery from scrap sale of PPE | 50,000 | 25,000 |
| v. Loss on Write-off of PPE | 4,50,000 | 5,75,000 |
Journal Entry
Case – 1
| 1 | Cash / Bank (Scrap sale) | 50,000 | |
| Loss on Write-off of PPE | 4,50,000 | ||
| Acc. Depreciation | 10,00,000 | ||
| 15,00,000 | |||
| To PPE | 15,00,000 | ||
| 2 | Cash / Bank (Scrap sale) | 25,000 | |
| Loss on Write-off of PPE | 5,75,000 | ||
| Acc. Depreciation | 12,00,000 | ||
| 18,00,000 | |||
| To PPE | 18,00,000 |
Conclusion: Understanding the accounting treatment for the derecognition, retirement, and disposal of PPE as per AS 10 is crucial for accurate financial reporting. This includes recognizing any gains or losses, properly measuring disposal proceeds, and adhering to the disclosure requirements. By following these guidelines, entities can ensure transparency and accuracy in their financial statements, providing clear insights into their asset management practices and financial health.
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