IFRS 5 – Non-current assets held for sale and discontinued operations requires entities that have sold, or plan to sell non-current assets to provide certain disclosures in relation to those assets.
The reason these disclosures are required is because by closing down or selling some operations, this will affect the future financial prospects of the entity.
By disclosing relevant information about these discontinued operations, the users of the financial statements can make a more reliable prediction of the future financial performance of the entity.
Definition
Before we get started, you should know that IFRS 5 defines a discontinued operation as a component of an entity that either:
- has been disposed of in the period, or
- is classified as ‘held for sale’ (disposal will occur ‘soon’).
A ‘component’ of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.
In other words, a component of an entity will have been a cash-generating unit or a group of cash-generating units while being held for use.
A component of an entity can be either:
- represents a separate major line of business or a significant geographical area of operations, or
- be a part of a single and co-ordinated plan to dispose of a separate major line of business or a significant geographical area of operations, or
- be a subsidiary company acquired exclusively with a view to re-sale.
Exceptions to the Definition
Keep in mind, if an entity sells a minor individual asset, or plans to sell one in the immediate future, this will not fall under the scope of IFRS 5 unless it meets the definition of a ‘component’ of the entity.
In most cases the gain or loss on the asset sold will be accounted for in the period of disposal, in accordance with the relevant accounting standards applicable to the asset, such as IAS 16 – Property, Plant and Equipment.
Not Applicable
The disposals of the following assets are not included within the scope of IFRS 5:
- Deferred tax assets (IAS 12 – Income Taxes)
- Assets arising from employee benefits (IAS 19 – Employee Benefits)
- Financial assets within the scope of IAS 39 – Financial Assets
- Investment property (IAS 40 – Investment Property)
Classification
IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations, requires an entity to classify assets as held for sale and present them in a separate account in the financial statements if their value will be realised principally from sale, rather than continuing use.
Assets ‘held for sale’ can be either:
- specific non-current assets, or
- a ‘disposal group’. A disposal group is a group of assets (and sometimes liabilities) that will be disposed of in a single transaction.
A disposal group is sometimes a division of a company, which is put up for sale.
An example of this is when C&C, the drinks company, sold it’s Tayto division a few years ago.
When management decided to put Tayto on the market, it would be a disposal group held for sale.
Criteria to Be Met
Before an asset or disposal group can be classified as held for sale, the following criteria must be met:
- Asset must be available for immediate sale. The entity has the ability and intention to transfer the asset to a purchaser in its current condition.
- The sale must be highly probable.
For a sale to be ‘highly probable’
- Management must be committed to selling the asset or disposal group, and an active programme to locate a buyer and complete the plan must have been initiated.
- The asset must be marketed for sale at a reasonable price in relation to its current fair value
- The sale should be expected to occur within one year of classification as held for sale. This can be extended if caused by circumstances outside of the entity’s control.
- It’s unlikely there will be significant changes to the plan or withdrawl of the plan to sell the assets
If an entity classifies an asset or disposal group is held for sale in the following financial period, they should not be classified as held for sale at the end of the current financial period.
Classification as held for sale is a non-adjusting event.
Assets held for sale
Once an asset is classified as “held for sale”, certain presentation and disclosures are required under IFRS 5 – Non-current assets held for sale and discontinued operations.
Once classified as ‘held for sale’ the asset should be measured at the lower of its:
- carrying value, and
- fair value less the costs to sell.
If the fair value less cost to sell is less than the carrying amount, this loss is recognised at the time that the asset is classified as held for sale.
Illustrative Example
Say for example a machine is classified as ‘held for sale’, when its carrying amount is €1 million.
If its fair value less estimated cost to sell is €800,000, the machine should be re-valued at €800,000 and a loss of €200,000 should be reported in the period.
Value Gain in the Asset
If there is a gain in the value of the asset compared to the carrying amount, the gain is not recognised until the asset is actually sold.
Let’s say for example that machine we mentioned earlier is classified as ‘held for sale’.
It’s carrying value is €1 million, but it’s fair value less estimated selling costs is €1.3 million.
The machine should be recorded at €1 million in the financial statements, the gain in value should only be recognised, or accounted for, once the sale actually takes place.
Held for Sale
An asset which is classified as ‘held for sale’:
- is included within current assets in the statement of financial position (because it will be sold in less than a year), and
- is not depreciated.
Abandoned
An asset that has been abandoned cannot be classified as ‘held for sale’.
This is because the value in the asset will be realised mainly from continuing use, not from a sale.
Abandoned assets do meet the criteria of a discontinued operation, and the entity should present their results and cash flows as a discontinued operation in the financial statements.
If an entity temporarily takes an asset out of use, it should not be classified as abandoned.
Working Example
Portal Plc, a window manufacturer, has the following assets on 31 December 2013.
Under IFRS 5, both of these assets meet the definition of a ‘component’.
- A window making machine with a carrying value of €1.25 million. At 31 December 2013, the company stopped using the machine as it recently acquired a more efficient window making machine. It kept it in care an maintenance just in case it would be needed as a backup. On 3 February 2014, Portal Plc was offered €1.1 million for the machine by Roberts Limited and the sale was complete in March 2014.
- A distribution warehouse which is currently advertised through a major estate agent in Dublin for sale at €3 million. The property was listed for sale in November 2012 and so far no buyer has been found. The company is hopeful of a sale. On 14 January 2014, an offer of €2.9 million was received for the warehouse and the sale was completed on 14 February 2014.
The financial statements were authorised for issue on 3 March 2014.
Under IFRS 5, can either of these assets be classified as “held for sale” in the financial statements for the year ending 31 December 2013?
Answer
1. Window making machine
Management had not committed to the sale of the window making machine at the year end and there was no active programme to find a buyer for it.
Accordingly, it should not be classified as held for sale.
2. Warehouse
The warehouse was available for immediate sale in its present condition at the year end.
It was also actively marketed for sale at a reasonable price.
Although the property was on the market for over a year, the delay in selling was not by any fault of theirs.
The final selling price was close to their asking price.
Therefore the warehouse may be classified as held for sale.
Measurement
Non-current assets or disposal groups classified as “held for sale” should be measured at the lower of:
- their carrying amount, and
- fair value less costs to sell.
Under IFRS 13 – Fair Value Measurement, fair value is the price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
If the carrying amount of the assets is greater than their fair value less cost to sell, the assets are impairment.
The impairment loss should be recognised in the income statement in the period they are classified as “held for sale”
Non-current assets classified as “held for sale” are not depreciated.
If an the sale of the asset or disposal group is expected to take more than one year, the calculation of selling costs should be based at present values.
Any increase in the selling costs due to inflation or the passage of time should be presented in the profit or loss as a financing cost.
No longer held for sale
Sometimes companies change their minds about selling assets or disposal groups. It’s fairly commonplace.
This happened recently when the government decided to cancel the sale of Coilte harvesting rights.
My friend often thinks about selling his car, list it for sale and change his mind later.
So what if a company does it?
Well the asset or disposal group will no longer be classified as “held for sale” and should be measured at the lower of:
- its carrying amount before classification as “held for sale”, adjusted for any depreciation, amortisation or revaluations that would have taken place if the asset wasn’t classified as “held for sale”.
- Its recoverable amount at the date of decision not to sell.