Understanding Recognition & Derecognition of Assets
Recognition of assets
Recognition is the process of formally introducing an item into the financial statements of an entity as an asset, liability, revenue, expense, or the like.
An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.
Asset’s recognition is an expenditure that will result in economic benefit flowing to the owner in future reporting periods.
De-recognition of assets
Derecognition of assets refers to the removal of an asset (or a portion thereof) from an entity's balance sheet.
An asset is derecognized upon its disposal or end of useful life when no future economic benefits can be expected or generated from its use or disposal. De-recognition can arise from a variety of events, such as an asset's sale, scrapping, exchanging, abandoning.
De-recognition results in removal of assets from the financial statements.
Asset de-recognition can be done or computed in the following mentioned ways:
In an asset sale, a firm sells some or all of its actual assets, either tangible or intangible. The gain or loss resulting from the sale of an asset is computed at the time of sale = The sales proceed amount of the asset - Carrying amount of the asset The gain or loss is explained on the income statement, either as a component of other gains or losses.
In accounting, scrapping is defined as material that's left over after production. Scrap has a low sales value if it has any value at all. Instead, scrap is leftover pieces of items that were used to make a product or as worthless or broken down into parts for disposal or salvage. It is also known as residual value, salvage value, or break-up value.
Scrap value of an asset differs based on the method of depreciation i.e. straight-line method (or) Reducing balance method.
Exchanging assets means a company exchanges a fixed asset with another asset and the company records the asset acquired at its fair value.
When an asset is exchanged, the carrying amount of the asset given up is removed from the balance sheet. The fair value of the acquired asset is added, and any difference between the carrying amount and the fair value is reported either as a gain or loss.
Abandonment is the act of surrendering a claim to, or interest in property, or a particular asset. Abandonment of an asset requires accounting for the asset's removal on the company’s financial statements.
When an asset is retired or abandoned, its value is reduced by carrying amount as at the time of its retirement or abandonment. A loss equal to the asset’s carrying amount is then recorded.
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