18-03-2011, 12:25 PM
(18-03-2011, 12:19 PM)edragon Wrote: If and when they dispose of depreciated properties, in most cases there will be an extra gain OR they will not be disposed in the first place. Loss in disposal is less likely IMO.
Well, I feel it's not really a case of "extra" gain. It's just a comparison between the Net Book Value (NBV) of a property versus the sale price. The difference is booked as a gain on disposal.
I can illustrate with an example:-
Property costs $50 million, depreciated over 40 years. Depreciation expenses = $1.25 million per year.
Assuming property is sold after 10 years at $60 million. The accumulated depreciation on this property would be $1.25 million X 10 = $12.5 million, so the NBV would be $37.5 million. The sale price minus the NBV would lead to a gain on disposal of $22.5 million.
Bearing in mind that expenses of $1.25 million per annum were already progressively recognized over each of the 10 years prior to the sale. Since the sale price after 10 years is still higher than original cost, it would mean that the gain reflects this higher value and will be recognized as a lump sum in the financial year in which the property was sold. So the true gain would be $22.5 million minus $12.5 million (expense over 10 years) = $10 million.
Hope this explains.
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