CFA Level I Exam · Analysis of Long-Term Assets

Derecognition and Disposal of Long-Term Assets

Updated 7 October 2026

Derecognition removes a long-term asset from the balance sheet when it is sold, abandoned or exchanged. Gain or loss on sale equals proceeds minus carrying amount, where carrying amount is cost minus accumulated depreciation and any impairment. Assets held for sale stop being depreciated and are measured at the lower of carrying amount and fair value less costs to sell.

Understand Derecognition and Disposal of Long-Term Assets

A long-term asset sits on the balance sheet at its carrying amount. This is cost less accumulated depreciation, less any impairment losses. When the company gets rid of the asset, it must remove it from the books. This is derecognition.

The company usually sells the asset. It compares the cash received (the proceeds) with the carrying amount. If proceeds are higher, there is a gain. If lower, there is a loss. The gain or loss goes to the income statement. Under IFRS it is not treated as revenue. A gain on sale is not part of operating cash flow: the cash proceeds are reported in investing activities (CFI).

If the company simply abandons the asset, there are no proceeds. The loss equals the full carrying amount. Depreciation must be recorded up to the date of abandonment first. If the asset is exchanged for another, the new asset is generally measured at the fair value of the asset given up (plus any cash paid, less any cash received). If the exchange lacks commercial substance, or if fair value cannot be measured reliably, the new asset is measured at the carrying amount of the asset given up, with no gain or loss recognized.

Sometimes management decides to sell an asset but has not sold it yet. Under IFRS 5, a non-current asset is classified as held for sale if its carrying amount will be recovered mainly through a sale, it is available for immediate sale, and the sale is highly probable (generally expected within one year). It is measured at the lower of carrying amount and fair value less costs to sell. Depreciation stops. IFRS 5 requires it to be presented separately from other assets on the balance sheet, as current. An impairment loss is recognized if fair value less costs to sell is below carrying amount.

An asset held for use is kept in operations and depreciated as normal. Under US GAAP, held-for-sale assets also use the lower of carrying amount and fair value less costs to sell and are not depreciated. A disposal group or discontinued operation is reported separately, which helps analysts see ongoing earnings.

Key formulas to remember

Carrying amount: Carrying amount = Cost − Accumulated depreciation − Accumulated impairment losses; Update depreciation to the date of disposal before computing any gain or loss.
Gain or loss on sale: Gain (loss) = Proceeds − Carrying amount; Positive is a gain; negative is a loss. Proceeds are net of selling costs where the question gives them.
Loss on abandonment: Loss = Carrying amount − 0; No proceeds, so the whole remaining carrying amount is written off.
Held-for-sale measurement: Carrying value = Lower of (carrying amount, fair value − costs to sell); Stop depreciation on classification. Any write-down is recognized as a loss.
Exchange with commercial substance: New asset = Fair value of asset given up ± cash paid or received; Gain (loss) = Fair value given up − Carrying amount; If fair value of the asset received is more clearly evident, use it instead. If fair value cannot be measured reliably, the new asset is measured at the carrying amount of the asset given up.

How to solve Derecognition and Disposal of Long-Term Assets questions

Use the same sequence for any disposal question. The main work is getting the correct carrying amount.

1Identify the event: sale, abandonment, exchange, or held-for-sale classification.
2Find cost, depreciation method and useful life, and compute depreciation up to the disposal date, including any partial year.
3Subtract accumulated depreciation and impairment from cost to get the carrying amount at disposal.
4For a sale, subtract selling costs from proceeds if given, then compute proceeds minus carrying amount.
5For abandonment, set proceeds to zero and write off the carrying amount as a loss.
6For held for sale, compare carrying amount with fair value less costs to sell, take the lower, and stop depreciation.
7State the effect: income statement gain or loss, cash proceeds in investing activities, asset removed from balance sheet.
8Check the sign and the choice among the three options.

Quickest way: Carrying amount first, then compare

When to use it: Use for any numerical sale, abandonment or held-for-sale item when time is short.

Write cost minus total depreciation to date. Do not forget the partial year before the sale.
Compare to the proceeds. Higher proceeds means gain; lower means loss.
For held for sale, compute fair value minus costs to sell and pick the smaller number.
Drop any option that has the wrong sign, or that ignores depreciation up to the sale date.

Common mistakes in Derecognition and Disposal of Long-Term Assets

Using original cost instead of carrying amount when computing the gain.
The cost is the first number in the question and looks like the base.
Fix: Always subtract accumulated depreciation and impairment first.
Forgetting depreciation for the part of the year before the sale.
The question gives annual depreciation and a mid-year sale date.
Fix: Prorate depreciation to the sale date, then compute carrying amount.
Continuing to depreciate an asset classified as held for sale.
Students treat it like any other asset still on the books.
Fix: Depreciation stops on classification as held for sale.
Ignoring costs to sell in the held-for-sale test.
Students compare carrying amount with fair value directly.
Fix: Use fair value less costs to sell.
Treating the gain on sale as operating cash inflow.
The gain appears in net income, so it seems operating.
Fix: Proceeds are in investing cash flow; the gain is deducted in the indirect method CFO reconciliation.
Reporting an abandoned asset with a gain or leaving it unwritten.
No cash is received, so students think there is no accounting effect.
Fix: Write off the carrying amount as a loss.

Worked examples

Example 1

A company bought equipment for $500,000 with a 10-year useful life, no residual value, and straight-line depreciation. After exactly 6 years it sells the equipment for $230,000. What is the gain or loss? (A) Loss of $270,000 (B) Gain of $30,000 (C) Gain of $230,000

Show the solution

Annual depreciation = $500,000 ÷ 10 = $50,000.
Accumulated depreciation after 6 years = 6 × $50,000 = $300,000.
Carrying amount = $500,000 − $300,000 = $200,000.
Gain = $230,000 − $200,000 = $30,000.
Option A compares proceeds with original cost: $230,000 − $500,000 = loss of $270,000. Option C treats the whole proceeds as a gain, as if the carrying amount were zero. Option B matches.

Answer: B. Gain of $30,000, recognized in the income statement. The $230,000 is in investing cash flow.

Example 2

On 31 December, management classifies a machine as held for sale. Cost was €800,000, accumulated depreciation is €500,000, fair value is €310,000 and expected costs to sell are €20,000. What loss, if any, is recognized on classification? (A) No loss (B) €10,000 (C) €20,000

Show the solution

Carrying amount = €800,000 − €500,000 = €300,000.
Fair value less costs to sell = €310,000 − €20,000 = €290,000.
Lower of the two = €290,000.
Write-down = €300,000 − €290,000 = €10,000.
Depreciation stops from this date.

Answer: B. A loss of €10,000 is recognized and the machine is carried at €290,000. Option A ignores costs to sell; option C uses costs to sell alone.

Exam tips

Almost every numerical item hinges on getting the carrying amount right, especially partial-year depreciation.
For held for sale, remember two things: stop depreciation and use fair value less costs to sell.
Watch for questions that ask about analyst effects: gain on sale is non-recurring, so strip it out of operating earnings when assessing sustainable profit.
Check whether the question asks for the cash flow classification. Proceeds always go to investing.

Practice questions from Analysis of Long-Term Assets

Derecognition and Disposal of Long-Term Assets: frequently asked questions

How do you calculate gain or loss on sale of equipment?

Compute carrying amount as cost minus accumulated depreciation and impairment, up to the sale date. Then subtract it from the net proceeds. A positive result is a gain and a negative result is a loss.

What is the difference between held for sale and held for use?

A held-for-use asset stays in operations and is depreciated. A held-for-sale asset is expected to be recovered through sale, is available now and the sale is highly probable. It stops being depreciated and is measured at the lower of carrying amount and fair value less costs to sell.

What happens when an asset is abandoned?

There are no proceeds. After recording depreciation to the abandonment date, the remaining carrying amount is written off as a loss. The asset is removed from the balance sheet.

Where does a sale of a long-term asset appear in the cash flow statement?

Cash proceeds are an investing inflow. In the indirect method, the gain is subtracted (and a loss added back) in the operating section so that the proceeds are not counted twice.