IAS18: IFRS 5 – NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

IFRS 5 – NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

OBJECTIVE

The objective of this standard is to specify the accounting for Non-current assets held for sale, and presentation and disclosure of discontinued operations.

NON-CURRENT ASSETS HELD FOR SALE

HELD FOR SALE

This term refers to a non-current asset whose carrying amount will be recovered principally through a sale transaction rather than through continuing use.

DISCONTINUED OPERATION

A discontinued operation includes the following criteria (Discussed in detail after measurement):

  • is a separately identifiable component
  • must represent a major line of the entity‘s business
  • is part of a plan to dispose of a major line of business or a geographical area
  • is a subsidiary acquired with a view to resell

DISPOSAL GROUP

This is a group of assets and possibly some liabilities that an entity intends to dispose of in a single transaction.

CLASSIFICATION OF NON-CURRENT ASSETS AS HELD FOR SALE

For an asset to be classified as held for sale:

  1. It must be available for immediate sale in its present condition allowing for terms that are usual or customary;
  2. Its sale must be highly probable {expected within 1 year of reclassification);
  3. It must be genuinely sold, not abandoned.

Immediate sale

The application of the phrase does make allowance for conditions considered ‘usual and customary’ in selling the asset, e.g. allowance would be made for searches and surveys when selling property.

No allowance is made for conditions imposed by the seller of the asset or disposal group.

Highly probable

For a sale to be highly probable it must be significantly more likely than probable. In addition the standard sets out the following criteria to be satisfied:

  • Management, at a level that has the authority to sell the assets or disposal group, is committed to a plan to sell;

 

  • An active program to locate a buyer and complete the sale must have begun. This will include making it known to those that might be interested that the asset or disposal group is available for sale;

 

  • The asset or disposal group must be actively marketed at a price that is reasonable compared to its current fair value.

 

This should take account of local conditions in the market. Thus if it is customary to price above fair value in the expectation of low bids, or vice versa, this is acceptable. The term actively marketed requires that the entity is making positive efforts to sell, not just to locate a buyer, e.g. by engaging a selling agent.

 

  • The sale of the asset is expected to be recorded as completed within time, ear from the date of classification.

 

(If the sale is not completed within one year and this is due to events beyond entity’s control, it is still possible for the asset to be continued to be classified as held for sale provided the entity is still committed to selling the asset).

 

  • The actions required to complete the plan should indicate that it is not likely that there will be significant changes made to the plan or that the plan will be withdrawn.

MEASUREMENT

Non-current assets or disposal groups that meet the criteria to be classified as held for sale are measured at the lower of:

    Fair value less costs to sell; and

    Carrying amount (in accordance with the relevant Standard).

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Costs to sell are “the incremental costs directly attributable to the disposal of an asset (or disposal group)”. Examples would include lawyer’s or estate agent’s fees.

The costs must be incremental; internal costs cannot be included in costs to sell.

Measurement on initial classification as held for sale

IFRS 5 requires that immediately before the initial classification of an asset (or disposal group) as held for sale, the carrying amount of the asset (or all the assets and liabilities in a disposal group) should be measured in accordance with the relevant IFRS.

Initial classification as held for sale may lead to a write down to fair value less costs to sell.

Note:

  • Any impairment loss on initial or subsequent write-down of the asset or disposal group to fair value less cost to sell is to be recognised in the statement of profit or loss.
  • Any subsequent increase in fair value less cost to sell can be recognised in the statement of profit or loss to the extent that it is not in excess of the cumulative impairment loss that has been recognised in accordance with the IFRS 5 or previously in accordance with IAS 36.
  • Any impairment loss recognised for disposal group should be applied in the order set out in IAS 36. The standard sets out how to allocate the impairment loss among the constituent parts of the disposal group (or cash generating unit). The loss itself is still charged to the statement of profit or loss.

SUBSEQUENT REMEASUREMENT

  • Whilst a non-current asset/disposal group is classified as held for sale it should not be depreciated or amortised.
  • At each reporting date where a non-current asset or disposal group continues to be classified as held for sale it should be re-measured at fair value less costs to sell at that date.
  • This may give rise to further impairments or a reversal of previous impairment losses. In either case recognise in the statement of profit or loss.

DISCONTINUED OPERATIONS – Detailed explanation

As mentioned earlier, discontinued operation is a component of an entity that:

i.) Either has been disposed of, or ii.)      Is classified as held for sale, and that component

 

  1. Represents a separate major line of business or geographical area of operations, or
  2. Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or
  3. It is a subsidiary acquired exclusively with a view to resale.

 

Component:

The standard defines this term as “operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity”.

A component will have been a single Cash Generating Unit (CGU) or a collection of CGUs while held for use in the business.

A component can be distinguished operationally and for financial reporting purposes if:

  • Its operating assets and liabilities can be directly attributed to it;
  • Its income (gross revenue) can be directly attributed to it;
  • At least a majority of its operating expenses can be directly attributed to it.

 

Classification as discontinued operation

A component of the reporting entity is classified as discontinued at:

  • The date of its disposal (sale/termination); or
  • Or when the operation meets the IFRS criteria to be classified as held for sale.

In order to have been classified as a discontinued operation by the reporting date the disposal or reclassification as ‘held for sale’ must have taken place by that reporting period end.

If an operation is to be terminated, but it is not actually closed by the reporting date then it will not be classified as discontinued at the year end.

Major line of business or geographical segment

A separate business segment or geographical segment as defined in IFRS 8 – Operating Segments, would normally meet this condition.

Single plan

If a component is not itself a separate major line of business or geographical area of operations then it must be “part of a single co-ordinated plan” to dispose of such a line of business or geographical area of operations. The single plan might relate to a disposal in one transaction or piecemeal.

PRESENTATION

  • Non-current assets that meet the criteria are presented separately on the Statement of Financial Position within current assets.
  • If the held for sale item is a disposal group then related liabilities are also reported separately within current liabilities.
  • Discontinued operations and operations held for sale must be disclosed separately in the statement of financial position at the lower of their carrying value less costs to sell.
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