IFRS 5 - Non-Current Assets Held for Sale and Discontinued Operations (detailed review)

Objective

This standard prescribes the criteria and the accounting treatment for the non-current assets which are to be classified as held for sale, along with the presentation requirements for such assets. It also provides the guidelines for the presentation of discontinued operations and related disclosures.

Scope

The classification, presentation and measurement requirements of this standard are applicable to the recognized non-current assets or a disposal group held by the entity. However the measurement provisions of this standard are not applicable to the following aspects:

• Financial assets which are covered under IFRS 9: Financial Instruments.
• Defer tax assets which are covered under IAS 12: Income Taxes
• Investment Property recognized under fair value model which is covered under IAS 40: Investment Property.
• Biological assets recognized at fair value less costs to sell which are covered under IAS 41: Agriculture
• Contractual rights related to insurance contracts which are covered under IFRS 4: Insurance Contracts.

The classification, presentation and measurement requirements of this IFRS are also applicable to a non-current asset or disposal group that is classified as held for distribution to owners which are acting in their capacity as owners.

Definition

Disposal Group

It is a group of assets, including some directly related liabilities, which is held for sale in a single transaction. The disposal group may include a single cash-generating unit, part of a cash-generating unit or a business segment.

Classification of Non-Current Asset or a Disposal Group
as held for Sale

A non-current asset or a disposal group will be classified as held for sale if its principal economic benefits are recoverable from a sale transaction rather than from its continuing use and it should also satisfy the following conditions:

(a) The asset or a disposal group is in its immediate present condition to sell, and

(b) The sale is highly probable, it will be the case when all of the following are satisfied:

• The asset is expected to be sold within one year from the date of classification as held for sale
• The management of the entity is committed to a plan to sell
• An active program is there to locate the buyer
• The asset or a disposal group is being marketed at a reasonable achievable selling price
• It is probable that management will not withdraw from its plan to sell

 

• If the asset or a disposal group classified as held for sale is not disposed off within one year from the date of classification, it will remain classified as held for sale if the entity is still committed to plan to sell and the delay is due to the circumstances which are not in control of the entity.

• An entity that is committed to a sale plan for a subsidiary which will result in loss of control over such subsidiary, will classify all the assets and liabilities of that subsidiary as held for sale when the above criteria is satisfied.

• The term ‘held for sale’ also includes exchange of asset for another non-current asset, provided the transaction will have commercial substance.

• The entity cannot classify as held for sale an asset or a disposal group that is to be abandoned or has been temporarily taken out of use. Because it’s economic benefits are recoverable principally from the continuing use.

• If an entity acquires an asset or a disposal group with the sole intention of its sale subsequently, the entity will classify such non-current asset or a disposal group as held for sale on the date of purchase, if it is expected to be sold within one year from the acquisition date and the "held for criteria" is met as specified in this standard.

• If an asset or a disposal group meets the criteria to be classified as held for sale after the year end date but before the authorization of the financial statements for issue, the entity will not classify such non-current asset or a disposal group as held for sale in those financial statements. However, the entity is required to disclose such information in the accompanied notes to accounts.

• A non-current asset or a disposal group held for distribution to owners, will be classified as held for distribution when:

(a) The asset is available for immediate distribution in its present condition and

(b) The distribution is highly probable i.e. actions to complete the distribution are expected to be completed within one year from the date of classification

Measurement of Non-Current Asset or a Disposal Group classified as held for Sale

The entity will measure a non-current asset or a disposal group which is classified as held for sale as follows:

• A non-current asset or a disposal group which is classified as held for sale will be initially measured at the lower of:

(a) The carrying value of the asset on the date of classification, and

(b) Its fair value less costs to sell on the same date

• A non-current asset or a disposal group which is classified as held for distribution to the owners will be initially measure at the lower of:

(a) The carrying value of the asset on the date of classification, and

(b) Its fair value less costs to distribute on the same date

• If an entity acquires a non-current asset or a disposal group exclusively with the intention to subsequent sale meets the criteria to be classified as held for sale at the acquisition date, it will be initially measured at:

(a) The carrying value of the asset on the date of classification (Cost), and

(b) Its fair value less costs to sell on the same date

• If in certain circumstances the sale is expected to take place after one year. The ‘costs to sell’ will be measured at their present value and any change in the present value of the costs to sell due to the span of time will be treated as a finance cost.

• The entity will apply the applicable standards to determine the carrying value of an asset or a disposal group which is classified as held for sale up to the date of initial classification into IFRS 5

• If fair value less cost to sell is lower than the carrying value of an asset or a disposal group on the date of classification, the difference will be impairment loss and the impairment loss related to the disposal group will reduce the carrying values of assets in the group in the order which is specified in IAS 36.

• At subsequent reporting date, the asset or the disposal group classified as held for sale will be re-measured at fair value less cost to sell on reporting date and any decrease in value will be treated as further impairment loss. However any increase in value will be treated as reversal of impairment loss which will be recognized up to extent of original impairment loss recognized previously either under the provisions of this standard or as per IAS 36.

• Any gain or further impairment loss related to disposal group will increase or reduce the carrying values of the assets in the disposal group in the same order as specified in IAS 36.

• The asset or a disposal group classified as held for sale will not be depreciated or amortized after it has been classified as held for sale.

Presentation of Non-Current Asset or Disposal Group classified as held for Sale

• A non-current asset and the assets of a disposal group classified as held for sale will be presented separately from other assets as a separate line item in the statement of financial position under current assets.

• The liabilities of a disposal group classified as held for sale shall be presented separately from other liabilities as a separate line item in the statement of financial position under current liabilities.

• The assets and liabilities of a disposal group which is classified as held for sale will not be offset and presented as a single amount.

 

Example of Presentation of Disposal Group held for Sale

Assets	$	$
Non-current assets
AA	x
BB	x
CC	x	x
Current assets
AA	x
BB	x	x
Non-current assets classified as held for sale		x
Total assets
Equity & Liabilities	$	$
Equity
AA	x
BB	x
Amounts relating to non-current assets held for sale	x	x
Non-controlling interests		x
Total equity		x
Non-current liabilities
AA	x
BB	x
CC	x	x
Current liabilities
AA	x
BB	x
CC	x	x
Liabilities related to non-current assets classified as held for sale		x
Total Liabilities		x
Total equity and liabilities		x

Changes to Plan to Sell

If a non-current asset or a disposal group which has been classified as held for sale, ceases to satisfy the criteria to be classified as held for sale, such an asset or disposal group will no more be classified as held for sale.

• The entity will measure a non-current asset or a disposal group that no longer meets the criteria to be classified as held for sale at the lower of:

(a) The carrying value of asset, if the asset or the disposal group had never been classified under IFRS 5 by taking into account the effect of any depreciation, amortization or revaluation, and

(b) The recoverable value of the asset on the same date.

• If the entity withdraws any particular asset or liability from a disposal group which is already classified as held for sale, the residual assets and liabilities in the disposal group will remain classified as held for sale and will be measured as per the measurement requirements of this standard. However, the assets that no longer meet the criteria will no more be classified as held for sale and will be measured as per the requirements mentioned in the above paragraph.

 

Disclosures

An entity is required to disclose the following information in the notes to accounts in respect of the non-current asset or a disposal group:

(a) The description of the non-current asset or the disposal group

(b) The description of the facts and circumstances, manner, and timing leading to the expected disposal

(c) Any gain or loss recognized in respect of non-current asset or disposal group classified as held for sale

(d) In respect of an asset, which ceases to be classified as held for sale, the entity should disclose a description of the facts and circumstances leading to the decision and the effect of the decision on the results of operations for the period.

Disclosures for the Discontinued Operations

Discontinued Operations

It is a component of an entity that either has been disposed off or is classified as held for sale during the current year, and it

• constitutes an independent substantial line of business or geographical part of the business operations

• is part of a single integrated plan to dispose off an independent substantial line of business operations

• is a subsidiary which has been acquired during the year solely with the intention to sell within one year.

Component

It encompasses any business operation or activity whose cash flows are clearly identifiable operationally and for financial reporting purposes from the rest of the entity. It may include a cash-generating unit or a business segment.

Presentation of the Discontinued Operations

An entity is required to disclose the following in respect of the discontinued operations:

(a) A single amount in the statement of profit or loss as a separate line item which includes the sum of the following elements:

• The after-tax profit or loss from discontinued operations and
• The after-tax gain or loss on measuring the assets and liabilities to fair value less costs to sell or on the disposal of the discontinued operation.

(b) The breakdown of the following elements:

• The income, expenses and before-tax profit or loss from discontinued operations
• Any tax payable
• The gain or loss on the measurement to fair value less costs to sell or on the disposal of the discontinued operation.

 

The analysis may be either presented in the statement of profit or loss or in the notes to accounts as follows:

• If single amount in the statement of profit or loss as a separate line item, the analysis will be presented in the notes to accounts.

• If the entity does not choose to present a single amount in the statement of profit or loss as a separate line item, then the analysis will be presented in the statement of profit or loss in a separate column, relating to discontinued operations, i.e. separately from continuing operations.

 

Worked Example

Example 1

(a) AB Ltd intends to sell the property after it completes the renovations to the property to increase the property’s sales value.

The delay in the timing of the transfer of the property imposed by the entity (seller) demonstrates that the property is not available for immediate sale. Therefore, it cannot be classified as held for sale.

(b) After the renovations have been completed, the property was classified as held for sale by AB Ltd, but before a firm sale commitment is obtained, the entity becomes aware of environmental damage requiring remedial actions.

AB Ltd still intends to sell the property. However, the entity does not have the ability to transfer the property to a buyer until the remedial actions are undertaken. The delay in the timing of the transfer of the property imposed by legal restrictions before a firm sale commitment reflects that the property is not available for immediate sale. Therefore, it cannot be classified as held for sale.

Example 2

AB Ltd has a plant having cost $40,000 which was purchased on 1 January 2005 with a useful life of 10 years. The plant was being used as part of its business operating capacity. On 30 June 2007, AB Ltd made a decision to classify the plant as held for sale and an agent was appointed for the sale of the plant that have started advertising the plant at a selling price of $$29,000 which was considered to be its fair value. The selling expenses are estimated to be $1,500. The asset has not yet been sold by the year end of 31 December 2007 and it has a fair value less cost to sell of $24,000 on this date.

Required:

How this will be accounted for in the financial statements of AB Ltd for the year ended 31.12.2007

Solution:

As the plant appears to have met the criteria to be classified as held for sale on 30 June 2007, it will be classified as held for sale on 30 June 2007 at lower of:

• Carrying value on the date of classification
• Its fair value less cost to sell on the same date

Working	31.12.07
	$
Cost	40,000
Less Accumulated Dep. ($40,000/10 years) × 2	(8,000)
Carrying value at 1.1.2007	32,000
Less Current Yr. Dep. (6 months) ($4,000 × 6/12)	(2,000)
Carrying value at 30.6.07	30,000
Impairment loss at 30.6.07	(2,500)
Fair value less cost to sell at 30.6.07 ($29,000 - $1,500)	27,500
Further impairment loss at 31.12.07	(3,500)
Fair value less cost to sell at 31.12.07	24,000

• If fair value less cost to sell is lower than the carrying value of asset on the date of classification the difference will be impairment loss.

• The asset classified as held for sale is not depreciated after being classified as held for sale

• The asset will be presented separately from other assets, as a separate line item in the statement of financial position under current assets at $24,000.