This article follows from the IFRS 5 criteria for the disposal of long-lived assets. If you have read the previous article, you may find sections of this article repetitive. However, if you are a Canadian CPA (or aspiring CPA) it's important to understand both criteria (in practice and for the CFEs).
Entities sometimes intend to sell their long-lived assets and/or their operations. Under ASPE 3475, a long-lived asset is defined as any asset that is not current (i.e. is not intended to be sold or disposed of within a year). Examples of long-lived assets include: property, plant and equipment. Examples of current assets include: cash, accounts receivable, and most inventory.
When operations are sold, they are often sold as “disposal group”. A disposal group is a group of assets that are to be disposed of together, in a single transaction (including their directly associated liabilities - e.g. a mortgage on a property). The group should include any goodwill acquired through a business combination and directly attributed to the disposal group. Examples of disposal groups include: operating units, cash generating units, and subsidiaries.
Selling long-lived assets can affect investors’ investment decisions. For example, the intention to sell off factories and operating units can significantly impact a business. Because we must abide by the Financial Reporting Characteristics (specifically "Relevance") and ensure that we are presenting all relevant information, we must ensure that readers of the financial statements know whether long-lived assets and disposal groups are being held for sale. ASPE 3475 provides guidance to help us determine when and how we should classify a long-lived asset or disposal group as held for sale.
In this article, we review:
When to classify the long-lived asset or disposal group as "Held for Sale."
How to recognize and measure the asset or disposal group once it is "Held for Sale."
How to present the potential sale in the Financial Statements.
When To Classify:
ASPE 3475 states that a long-lived assets or disposal groups should be classified as “Held for Sale” when all of the following criteria are met:
Management with authority to sell, commit to a plan to sell, AND
The asset/disposal group must be available for immediate sale in its current condition, AND
An active plan to find a buyer for the asset must have been initiated, AND
The sale is probable and should be expected within 12 months from classification as held for sale. If the asset/disposal group takes longer than 12 months to sell, it will remain classified as Held-for-Sale as long as the remaining criteria are met, and as long as the delay is caused by events or circumstances that are not within the entity's control (e.g. a market downturn). Specific detail as to the circumstances for a delay beyond one year are described in the section below. AND
The asset/disposal group is actively marketed for sale at a reasonable price (based on its current fair value), AND
It is unlikely that there will be significant changes to the sales plan, or that the sales plan could be withdrawn.
Delay of Sale Beyond 1 year:
ASPE 3475 provides fairly specific guidance as to the circumstances under which we can delay the sale beyond one year, and still classify the asset/disposal group as “Held for Sale”. If one of the following are met, we can still classify the asset/disposal group as "Held for Sale":
(a) At the date the entity commits to a plan to sell, it reasonably expects that the buyer may impose conditions that will extend the period beyond one year, and:
“actions necessary to respond to the conditions cannot be initiated until after a firm purchase commitment is obtained; AND
a firm purchase commitment is probable within one year;” (ASPE 3475)
(b) The entity obtains a firm purchase commitment, and the buyer or others unexpectedly impose(s) conditions that will extend the period required to complete the sale, and:
“actions necessary to respond to the conditions have been initiated or will be initiated in a timely manner; AND
a favorable resolution of the delaying factors is expected;” (ASPE 3475)
(c) Unexpected or unlikely circumstances arise during the one-year sale period, which result in the asset/disposal group not being sold within the period, and:
“during the initial one-year period, the enterprise initiated actions necessary to respond to the change in circumstances; AND
the asset is being actively marketed at a price that is reasonable given the change in circumstances;” AND
the classification criteria above, are still met. (ASPE 3475)
Recognition and Measurement:
The asset(s) or disposal groups are initially valued at the lower of:
1) Carrying amount
2) Fair value (FV) less selling cost
Selling costs do not include tax on disposal
If the long-lived asset or disposal group has recently been acquired by the entity, then the carrying amount that we should use is the FV less selling cost, at the date the asset was acquired (acquisition date).
Sample Journal Entry:
The following is a sample journal entry assuming there is an impairment loss upon classification as "Held for Sale."
ASPE 3475 describes how gains and losses should be dealt with when reporting in subsequent periods:
Losses or write downs should be recognized and reported in the Income Statement, along with a decrease in value of the Asset which is "Held for Sale."
Gains should also be recognized in the Income Statement, along with an increase in value for the Asset Held for Sale. However, we are limited to the total of the previous losses reported. In other words - we can only reverse the losses we already made.
Sample Journal Entry:
The following is a sample journal entry assuming there is a subsequent loss. c
No depreciation is recorded while assets or disposal groups are classified as Held for Sale.
Long-lived Assets and Disposal Groups:
Long-lived Assets and disposal groups that are "Held for Sale" are presented in their own category “Long-lived Assets Classified as Held for Sale” in the Balance Sheet, under the “Assets” category.
Disposal groups can include both assets and liabilities - we must therefore ensure that all elements are presented transparently. As such, both the assets and the liabilities of a disposal group classified must be presented separately from each other. They cannot offset each other or be presented as a single amount. There are some rare exceptions to this rule, which allow offsetting. These exceptions only apply to specific financial instruments.
In order for an asset to be considered a discontinued operation, it must have been disposed of or classified as Held for Sale, and:
“represent a separate major line of business or geographical area of operations, OR
be part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations OR
be a subsidiary acquired exclusively with a view to resale.” (ASPE 3475)
The discontinued operation is presented in the Income Statement as the total of the after-tax profit or loss of discontinued operations.
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