IFRS 5 - Non Current Assets Held for Sale and Discontinued Operations

Background

This standard prescribes the accounting for assets held sale, and the presentation and disclosure of discontinued operations. In particular, the standard require assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less cost to sell, and depreciation on such assets to cease and to be presented separately in the financial statements. The standard also requires the results of discontinued operations to be presented separately in the statement of income.

The standard adopts the classification "held for sale" and introduces the concept of a disposal group, being a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. This standard classifies an operation as discontinued at the date the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation. An entity shall not classify as held for sale a non-current asset that is to be abandoned, as its carrying amount will be recovered principally through continuing use.

Assets held for sale

Assets held for sale

In general, the following conditions must be met for an assets (or 'disposal group') to be classified as held for sale:

• Management is committed to a plan to sell
• The asset is available for immediate sale
• An active program to locate a buyer is initiated
• The sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions)
• The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
• Actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn

The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition but may be classified as discontinued once abandoned.

Disposal Group

A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to dispose of in a single transaction. The measurement basis required for non-current assets classified as held for sale applied to the group as a whole, and any resulting impairment loss reduces the carrying amount of the non-current assets in the disposal group in the order of allocation required by IAS 36.

Measurement

The following principles apply;

At the time of classification as held for sale

Immediately before the initial classification of the asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable IASs. Resulting adjustments are also recognized in accordance with applicable IASs.

After classification as held for sale

Non-current assets or disposal groups that are classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Impairment

Impairment must be considered voth at the time of classification as held for sale and subsequently:

• At the time of classification as held for sale. Immediately prior to classifying an asset or disposal group as held for dale, measure and recognize impairment in accordance with the applicable IASs (generally IAS 16, IAS 36). Any impairment loss is recognized in profit or loss unless the asset had been measured at revalued amount under IAS 16, in which case the impairment is treated as a revaluation decrease.
• After classification as held for sale. Calculate any impairment loss based on the difference between the adjusted carrying amounts of the asset / disposal group and fair value less costs to sell. Any impairment loss that arises by using the measurement principles in IFRS 5 must be recognized in profit or loss even for assets previously carried at revalued amounts.

Assets carried at fair value prior to initial classification

For such assets, the requirement to deduct costs to sell from fair value will result in an immediate charge to profit or loss.

Subsequent increases in fair value

A gain for any subsequent increase in fair value less cost to sell of an asset can be recognized in the profit or loss to the extent that is not in excess of the cumulative impairment loss that has been recognized in accordance with IFRS 5 or previously in accordance with IAS 36.

Depreciation

Non-current assets or disposal groups that are classified as held for sale not be depreciated.

Balance sheet presentation

Assets classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale, must be presented separately on the face of the balance sheet.

Disclosures of non-current assets held for sale

• Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale must be disclosed separately from other assets in the balance sheet.
• The liabilities of of a disposal group classified as held for sale must also be disclosed separately from other liabilities in the balance sheet.
• There are also several other additional disclosures including a description of the nature of assets held and the facts and circumstances surrounding the sale.

Subsidiaries for disposal

IFRS 5 applies to accounting for an investment in a subsidiary for which control is intended to be temporary because the subsidiary was acquired and is held exclusively with a view to its subsequent disposal in the near future. For such subsidiary, if it is highly probable that the sale will be completed within 12 months then the parent should account for its investment in the subsidiary under IFRS 5 as an asset held for sale, rather than consolidate it under IAS 27.

However, IAS 27 still requires that if a subsidiary that had previously been consolidated is now being held for sale, the parent must continue to consolidate such a subsidiary until it is actually disposed of. It is not excluded from consolidation and reported as an asset held for sale under IFRS 5.

Discontinued operations

Classification as discontinuing

A discontinued operation is a component of an entity that either has 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 a separate major line of business or geographical area of operations, or
• Is a subsidiary acquired exclusively with a view to resale

Income statement presentation

The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognized on the measurement to fair value less cost to sell or fair value adjustments on the disposal of the assets (or disposal group) should be presented as a single amount on the face of the income statement. Detailed disclosure of revenue, expenses, pre-tax profit or loss, and related income taxes is required either in the notes or on the face of the income statement in a section distinct from continuing operations. Such detailed disclosures must over both the current and all prior periods presented in the financial statements.

Cash flow statement presentation

In addition to the income statement and cash flow statement presentations noted above, the following disclosures are required:

• Adjustments made in the current period to amounts disclosed as a discontinued operation in prior periods must be separately disclosed
• If an entity ceases to classify a component as held for sale, the results of that component previously presented in discontinued operations must be reclassified and included in income from continuing operations for all periods presented.