Do you depreciate assets held for sale?
In the world of accounting and financial reporting, the treatment of assets held for sale is a topic that often sparks debate and confusion. This article aims to shed light on whether assets held for sale should be depreciated and the rationale behind this accounting practice.
Assets held for sale are those that a company intends to sell in the near future, typically within one year. These assets may include property, plant, and equipment, intangible assets, or even inventory. The question of whether these assets should be depreciated is crucial for accurate financial reporting and decision-making.
The general rule in accounting is that assets are depreciated over their useful lives to reflect their consumption over time. However, when it comes to assets held for sale, the accounting standards provide specific guidance. According to International Financial Reporting Standards (IFRS) 5 and the Financial Accounting Standards Board (FASB) ASC 450, assets held for sale are not depreciated.
The rationale behind this rule is that assets held for sale are not being used in the company’s normal operations. Instead, they are being held solely for the purpose of sale. Depreciating these assets would not accurately reflect their current value or the potential proceeds from their sale. Therefore, the carrying amount of assets held for sale is reduced to their fair value less costs to sell, which is recognized as a gain or loss on disposal in the income statement.
It is important to note that the determination of whether an asset is held for sale is not solely based on the intention to sell. The criteria for classification as an asset held for sale include the asset being available for immediate sale in its present condition, the sale being highly probable, and the asset being actively marketed for sale.
In conclusion, the answer to the question “Do you depreciate assets held for sale?” is no. According to accounting standards, assets held for sale are not depreciated. This rule ensures that the financial statements accurately reflect the fair value of these assets and provide relevant information to users of the financial statements.
