IFRS 5, Non-current Assets Held-for-sale and Discontinued Operations
By Graham Holt
Introduction
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The article
IFRS 5 deals with the accounting for non-current assets held-for-sale, and the presentation and disclosure of discontinued operations. It introduces a classification for non-current assets which is called ‘held-for-sale’. An entity classifies a non-current asset as held-for-sale if its carrying amount will be recovered mainly through selling the asset rather than through usage. The classification also applies to disposal groups, which are a group of assets and possibly some liabilities which an entity intends to dispose of in a single transaction.
The conditions for a non-current asset or disposal group to be classified as held-for-sale are as follows:
- the assets must be available for immediate sale in their present condition and its sale must be highly probable
- the asset must be currently marketed actively at a price that is reasonable in relation to its current fair value
- the sale should be completed, or expected to be so, within a year from the date of the classification, and
- the actions required to complete the planned sale will have been made, and it is unlikely that the plan will be significantly changed or withdrawn.
For the sale to be highly probable, management must be committed to selling the asset and must be actively looking for a buyer. It is possible that the sale may not be completed within one year, but the delay effectively must be caused by events beyond the entity’s control and the entity must still be committed to selling the asset.
Example
An entity has agreed in a directors’ meeting to sell a building, and has tentatively
started looking for a buyer for the building. The price of the building has
been fixed at $4m and a surveyor has valued the building based on market prices
at $3.6m. The entity will continue to use the building until another building
has been found with equivalent facilities, and in a suitable location for the
office staff, who will not be relocated until the new building has been found.
Additionally, the entity is planning to sell part of its business and has actively
marketed the business at a fair price but, before the business can be sold,
government approval is required and any sale requires government approval. This
means that the sale time is difficult to determine and it may take longer than
one year to sell the disposal group.
Answer
The building will not be classified as held-for-sale as it is not available
for immediate sale because, until new premises have been found, the office staff
will remain in the existing building. Also, the directors have only tentatively
started looking for a buyer which may indicate that the entity is not committed
to the sale. Additionally, the price being asked for the building is above the
market price, and is not reasonable compared to that price. It is unlikely that
the entity will sell the building for that price.
The disposal group, however, would be classified as held-for-sale because the
delay is caused by events or circumstances beyond the entity’s control, and
there is evidence that the entity is committed to selling the disposal group.
Measurement of non-current assets which are held-for-sale
Just before the initial classification of a non-current asset (disposal group) as held-for-sale, it should be measured in accordance with IFRS. When non-current assets or disposal groups are classified as held-for-sale, they are measured at the lower of the carrying amount and fair value less cost to sell. If the sale is expected to occur in over a year’s time, the entity should measure the cost to sell at its present value, and any increase due to the unwinding of the discount is charged to profit or loss.
Any subsequent increases in fair value less cost to sell of the asset can be recognised in profit and loss to the extent that it is not in excess of the cumulative impairment loss that has been recognised.
Non-current assets or disposal groups classified as held-for-sale should not be depreciated.
Other key points
Entities often acquire non-current assets exclusively with a view to disposal. Such a non-current asset will be classified as held-for-sale at the date of the acquisition only if it is anticipated that it will be sold within the one-year period, and it is highly probable that the held-for-sale criteria will be met within a short period (normally three months) of the acquisition date. If the criteria for classifying a non-current asset as held-for-sale occur after the balance sheet date, then the non-current asset should not be shown as held-for-sale but disclosure of the fact should be made.
If an entity is winding up operations or ‘abandoning’ assets, then these assets do not meet the definition of held-for-sale. However, a disposal group that is to be abandoned may meet the definition of a discontinued activity. Abandonment means that the non-current asset has been used to the end of its economic life or the disposal group will be closed rather than sold. If the asset is temporarily not being used, it is not deemed to be abandoned.
Example
An entity has stopped using certain plants because of a downturn in orders.
It is maintaining the plant as the entity hopes that orders will pick up in
future. Additionally, it intends to shut down one-half of its manufacturing
base. The units to be closed constitute a major segment of its business and
will close in the current financial year.
Answer
The equipment will not be treated as abandoned as it will subsequently be brought
back into usage, and the manufacturing units will be treated as discontinued
operations.
Change of plans
If criteria for an asset to be classified as held-for-sale are no longer met, then the asset or disposal group ceases to be held-for-sale. In this case, it should be valued at the lower of the carrying amount before the asset or disposal group was classified as held-for-sale (as adjusted for any subsequent depreciation, amortisation or re-valuation), and its recoverable amount at the date of the decision not to sell. Any adjustment to the value should be shown in income from continuing operations for the period.
Disclosure – non-current assets held-for-sale
Non-current assets held-for-sale and assets of disposal groups must be disclosed separately from other assets in the balance sheet. The liabilities must also be disclosed separately in the balance sheet. There are several other discloses required, including a description of the non-current assets of a disposal group, a description of the facts and circumstances of the sale, and the expected manner and timing of that disposal.
Discontinued operations: presentation and disclosure
A discontinued operation is a part of an entity that has either been disposed of or is classified as held-for-sale, and:
- represents a separate major line of business or geographical area of operations
- is part of a single co-ordinated plan to dispose of separate major lines of business or geographical area of operations, or
- the subsidiary was acquired exclusively with a view to resale.
The total of the post-tax profit or loss of the discontinued operation, and the post-tax gain or loss recognised on the measurement to fair value less cost to sell (or on the disposal), should be presented as a single figure on the face of the income statement.
IFRS 5 requires detailed disclosure of revenue, expenses, pre-tax profit or loss, and the related income tax expense either in the notes or on the face of the income statement. If this information is presented on the face of the income statement, then the information should be separately disclosed from that of continuing operations.
As regards the presentation in the cash flow statement, the net cash flows attributable to the operating, investing and financing activities of the discontinued operation should be separately shown on the face of the cash flow statement or disclosed in the notes. Retrospective classification as a discontinued operation where the criteria are met after the balance sheet date is prohibited by IFRS 5.
Example
An entity plans to dispose of a group of net assets which form a disposal group. The net assets at 31 December 2006 are set out below.
| Carrying value at 31 Dec 2006 $m | |
|---|---|
| Goodwill | 16 |
| Property, plant and equipment | 28 |
| Inventory | 20 |
| Financial assets (profit of $4m recognised in equity) | 17 |
| Financial liabilities | (14) |
| 67 |
The property, plant and equipment and inventory were stated at deemed cost on moving to IFRS. Under IFRS, property, plant and equipment would be stated at $26m, and inventory stated at $18m. The fair value less costs to sell of the disposal group is $47m. Assume that the disposal group qualifies as held-for-sale.
Show how the disposal group would be accounted for in the financial statements for the year ended 31 December 2006.
| Carrying value $m | Re- measured $m | Impairment $m | Fair value less costs to sell $m | |
|---|---|---|---|---|
| Goodwill | 16 | 16 | (16) | – |
| Property, plant and equipment | 28 | 26 | 26 | |
| Inventory | 20 | 18 | 18 | |
| Financial assets | 17 | 17 | 17 | |
| Financial liabilities | (14) | (14) | (14) | |
| 67 | 63 | (16) | 47 |
Answer
IFRS 5 requires that immediately before the initial classification of the disposal group as held-for-sale, the carrying amounts of the disposal group be measured in accordance with applicable IFRS, and any profit or loss dealt with under that IFRS. The reduction in the carrying amount of property, plant and equipment will be dealt with in accordance with IAS 16, and that of the inventory in accordance with IAS 2.
After the re-measurement, the entity will recognise an impairment loss of $16m on re-measurement to the lower of carrying amount and fair value less cost to sell. This loss is allocated to goodwill in accordance with IAS 36. Thus, goodwill will be reduced to zero. The loss will be charged against profit or loss.
In the balance sheet, the major classes of assets and liabilities classified as held-for-sale should be separately disclosed on the face of the balance sheet or in the notes. Thus, in this case, there would be separate disclosure of the disposal group as follows.
| $m | |
|---|---|
| Assets | |
| Non-current assets | |
| Current assets | |
| Non-current assets and current assets classified as held-for-sale (note) |
61 |
| Equity and liabilities | |
| Equity attributable to parent | |
| Amounts recognised directly in equity relating to non-current assets held-for-sale | |
| Minority interest | |
| Total equity | |
| Non-current liabilities | |
| Current liabilities | |
| Liabilities directory associated with non- current assets classified as held-for-sale |
14 |
| Total liabilities | |
| Total equity and liabilities |
Graham Holt is principal lecturer in accounting and finance at the Manchester Metropolitan University Business School, and an ACCA examiner.