Entities sometimes intend to sell their non-current assets (e.g. Property, Plant and Equipment) and/or their operations. While the intention to sell a small piece of equipment may not affect investment decisions, the intention to sell off factories and operating units can affect investors’ choices. 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 non-current assets and disposal groups are being held for sale. IFRS 5 provides guidance to help us determine when and how we should classify a non-current asset or disposal group as held for sale.
In this article, we review:
When to classify the non-current 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:
Non-Current assets (e.g. Property, Plant and Equipment) and disposal groups should be classified as “Held-for-Sale” when the “carrying amount will be recovered principally through a sale transaction rather than through continuing use.” (IFRS 5)
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.
Throughout this article it is important to make clear that we are distinguishing between current and non-current assets. Current assets (such as most inventory) are expected to be sold or disposed of within the year. Therefore, there is no need to classify them in any special manner. We only address non-current assets when referring to “assets” in this article. However, disposal groups may include current assets as part of their bundle. For example - the sale of a subsidiary may include the subsidiary’s inventory on hand.
Now back to our original classification... In order for us to expect the carrying amount to be recovered principally through a sale, the following must be true about the non-current asset and/or disposal group:
1) It must be available for immediate sale in its current condition, AND
2) The sale must be highly probable:
The appropriate level of management must be committed to selling the asset AND
An active plan to find a buyer for the asset must have been initiated AND
The asset must be actively marketed at a reasonable price AND
A sale 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 the delay is caused by events or circumstances that are not within the entity's control (e.g. a market downturn).
If an entity acquires asset(s) or disposal group(s) with the intention of selling/disposing of them, the entity can classify the asset(s)/disposal group(s) as Held-for-Sale at the acquisition date, as long as the criteria above are met.
Recognition and Measurement:
Initial Recognition
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 FV less selling cost is < Carrying Amount, then we need to record an Impairment Loss. For more information about Impairment Losses, click here.
Sample Journal Entry:
The following is a sample journal entry assuming there is an impairment loss.
Subsequent Recognition
After the asset(s) or disposal group(s) have been classified as held for sale, they must be measured at every reporting period, at the lower of:
Carrying amount
FV less selling cost
Subsequent recognition can result in a further impairment loss (if FV less cost to sell < Carrying Amount), which is reported in Statement of Profit or Loss, as per the Impairment Criteria. Subsequent recognition can also result in a gain (if FV less cost to sell > Carrying Amount). As described in our article about Revaluations, gains first reverse any prior impairments and then anything more than the impairment loss becomes a Revaluation Surplus. See this article to review Revaluations.
Sample Journal Entry:
The following is a sample journal entry assuming there is a gain after a prior impairment loss.
Depreciation
No depreciation is recorded when assets or disposal groups are held for sale.
Presentation
Non-Current Assets or Disposal Groups:
Non-Current Assets and disposal groups Held for Sale are presented in their own category “Non-Current Assets Classified as Held for Sale” in the Statement of Financial Position under the “Assets” category.
Disposal groups can include both assets and liabilities - we must therefore ensure that all elements are presented transparently. As such, the liabilities of a disposal group classified as held for sale must be presented separately from other liabilities. These liabilities cannot be offset by assets or presented as a single amount.
Discontinued Operations:
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.” (IFRS 5)
The discontinued operation is presented in the Statement of Comprehensive Income as the total of:
“the post-tax profit or loss of discontinued operations AND
the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.” (IFRS 5)
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