What is Asset Derecognition?

Asset derecognition is the process of removing an asset from a company's balance sheet when it is no longer controlled or owned by the business. This typically occurs when the asset is sold, disposed of, fully depreciated, or no longer expected to provide economic benefits. Derecognition ensures that financial statements accurately reflect only the assets that the company still controls.

Accounting for an Asset Derecognition

A gain or loss can be recognized from an asset’s derecognition, though a gain on derecognition cannot be recorded as revenue. The gain or loss on derecognition is calculated as the net disposal proceeds, minus the asset’s carrying value. For example, a company disposes of a $100,000 machine, after owning it for seven years, and sells it for $35,000 in cash. It has already recorded $70,000 of depreciation expense. The entry is as follows: