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

IFRS 5

Objective, Scope and Definitions

Classifications

Non-current assets to be abandoned

Initial and Subsequent measurement

Impairment reversal

Ceases to be held for sale

Accounting treatment when the sale is expected to be beyond one year

Presentation and Disclosures

The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations. In particular, the IFRS requires:

• 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 costs to sell, and depreciation on such assets to cease; and
• assets that meet the criteria to be classified as held for sale to be presented separately in the statement of financial position and the results of discontinued operations to be presented separately in the statement of comprehensive income.

(IFRS 5: para.1)

The classification and presentation requirements of this IFRS apply to all recognised non‑current assets and to all disposal groups of an entity. The measurement requirements of this IFRS apply to all recognised non‑current assets and disposal groups.

The measurement provisions of this IFRS do not apply to the following assets, which are covered by the IFRSs listed, either as individual assets or as part of a disposal group:

• deferred tax assets (IAS 12 Income Taxes).
• assets arising from employee benefits (IAS 19 Employee Benefits).
• financial assets within the scope of IFRS 9 Financial Instruments.
• non‑current assets that are accounted for in accordance with the fair value model in IAS 40 Investment Property.
• non‑current assets that are measured at fair value less costs to sell in accordance with IAS 41 Agriculture.
• contractual rights under insurance contracts as defined in IFRS 4 Insurance Contracts.

(IFRS 5: para. 2-5)

Example:

Classification of non-current assets held for sale On 31 October year one, the business decides to sell a piece of land as the price has increased recently.

On 31 December year one, the board agreed with the decision to sell the piece of land. The management approached various real estate agents and agreed the sales commission when the land would be sold. The price to sell the land is near its fair value. The management estimates it may take 5 months after the date of reclassification to sell the land.

However, according to the environmental law, the management needs to restore the land to its original condition, and the management estimates that it will be fully completed on 15 February year two.

The business has received a firm purchase commitment from the buyer as at 31 December year one, and the buyer can do the restoration work on behalf of the business per the contract.

Required:

When should the above piece of land be classified as a non-current asset held for sale?

Answer:

The piece of land can be reclassified as a non-current asset held for sale as at 31 December year one:

1. The sale is highly probable: this can be confirmed by:

Example: Classification of non-current assets held for sale

An entity ceases to use a manufacturing plant because the demand for its product has declined. However, the plant is maintained in workable condition, and it is expected that it will be brought back into use if demand picks up.

Required:

Whether the plant is regarded as abandoned?

Answer:

The plant is not regarded as abandoned and it should be accounted for per IAS 16 PP&E.

An entity shall measure a non‑current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell.

(IFRS 5: para. 15)

Example:

On 31 December year one, a plant is qualified as ‘non-current asset held for sale’ and its carrying value at the date of classification is $50 million. The fair value of the plant at the date of classification is $60 million and the fair value less costs to sell is estimated to be $3 million.

Required:

Accounting treatment.

Answer:

Alternatively, the derecognition of PP&E at carrying value should be:

An entity shall recognise an impairment loss for any initial or subsequent write‑down of the asset (or disposal group) to fair value less costs to sell.

(IFRS 5: para. 20)

Example:

On 31 December year one, a plant is qualified as ‘non-current assets held for sale’ and its carrying value at the date of classification is $50 million. The fair value of the plant at the date of classification is $30 million and the fair value less costs to sell is estimated to be $3 million.

Required:

Accounting treatment.

Answer:

An entity shall not depreciate (or amortise) a non‑current asset while it is classified as held for sale or while it is part of a disposal group classified as held for sale.

(IFRS 5: para. 25)

Example:

An entity has reclassified a factory as a non-current asset held for sale as at 31 December year one for $60 million. The entity estimates that the value of the non-current assets held for sale has further decreased to $45 million due to the emergence of impairment indicators.

Required:

Accounting treatment.

Answer:

Please note, the non-current assets held for sale should not be further depreciated.

An entity shall recognise a gain for any subsequent increase in fair value less costs to sell of an asset, but not in excess of the cumulative impairment loss that has been recognised either in accordance with this IFRS 5 (impairment losses incurred after the asset has been classified as non-current assets held for sale) or previously in accordance with IAS 36 Impairment of Assets (ie if there are no impairment losses after the asset has been classified as non-current assets held for sale but there were losses before the asset was classified as non-current assets held for sale).

(IFRS 5: para. 21)

Example:

As at the reporting date, $5 million worth intangible assets are classified as non-current assets held for sale per IFRS 5. Subsequently, $1.5 million impairment loss incurred regarding the non-current assets held for sale. Two months later, the fair value less costs to sell of the intangible asset increases up to $6 million.

Required:

Accounting treatment for the impairment reversal.

Answer:

Impairment loss incurred:

Reversal of impairment loss:

Although the fair value less costs to sell increases to $6m (ie by $2.5m from $3.5m to $6m), but it should not in excess of the cumulative impairment loss that has been recognised.

The entity shall measure a non‑current asset (or disposal group) that ceases to be classified as held for sale or as held for distribution to owners (or ceases to be included in a disposal group classified as held for sale or as held for distribution to owners) at the lower of:

• its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale or as held for distribution to owners, and
• its recoverable amount at the date of the subsequent decision not to sell or distribute.

(IFRS 5: para. 27)

Example:

A plant was reclassified as a non-current asset held for sale as at 31 December year one. The original cost of the plant was $10 million and the accumulated depreciation up to the date of reclassification was $3 million.

Should the asset not be classified as non-current assets held for sale, the depreciation charge would be $100,000 per month. At the time the asset was classified as held for sale, its fair value less costs to sell was higher than its carrying amount.

Six months later, the criteria for non-current assets held for sale ceases to exist. The recoverable amount at the date of the decision not to sell is $6 million.

Required:

Accounting treatment.

Answer:

1. At the time of reclassification:

2. At the time that the asset was ceased to be classified as held for sale:

Should the reclassification not take place: initial carrying value $7m – additional 6 months depreciation ($0.1m x 6months) = $6.4m

The recoverable amount at the date of the decision not to sell: $6m

Therefore, $6m is chosen in this case since this is lower than the carrying value should the reclassification not take place:

When the sale is expected to occur beyond one year, the entity shall measure the costs to sell at their present value. Any increase in the present value of the costs to sell that arises from the passage of time shall be presented in profit or loss as a financing cost.

(IFRS 5: para. 17)

Example: Classification of non-current assets held for sale

On 31 December year one, a piece of land is qualified as ‘non-current assets held for sale’ and its carrying value at the date of classification is $50 million. The fair value of the land at the date of classification is $30 million and the fair value less costs to sell is estimated to be $3 million. The sale is not completed within one year, and the management expects the sale will complete beyond one year, however, the delay is caused by events beyond the entity’s control, and there is sufficient evidence for this. The fair value of the land at this time is still $30 million, but the present value of estimated costs has been increased to $4 million due to passage of time.

Required:

Accounting treatment.

Answer:

When it is beyond one year:

Initial fair value less costs to sell: $30 million - $3 million = $27 million

Updated fair value less costs to sell: $30 million - $4 million = $26 million.

1. An entity shall present a non‑current asset classified as held for sale and the assets of a disposal group classified as held for sale separately from other assets in the statement of financial position.

2. The liabilities of a disposal group classified as held for sale shall be presented separately from other liabilities in the statement of financial position.

3. Those assets and liabilities shall not be offset and presented as a single amount.

4. The major classes of assets and liabilities classified as held for sale shall be separately disclosed either in the statement of financial position or in the notes.

(IFRS 5: para. 38)

Assets

Non-current assets

X

Current assets

Y

Non-current assets classified as held for sale

Z

Total assets

X+Y+Z

Equity and liabilities

Equity

A

Liabilities

Non-current liabilities

B

Current liabilities

C

Liabilities directly associated with non-current assets classified as held for sale

D

Total equity and liabilities

A+B+C+D

An entity shall disclose the following information in the notes in the period in which a non‑current asset (or disposal group) has been either classified as held for sale or sold:

• a description of the non‑current asset (or disposal group);
• a description of the facts and circumstances of the sale, or leading to the expected disposal, and the expected manner and timing of that disposal;
• the gain or loss recognised and, if not separately presented in the statement of comprehensive income, the caption in the statement of comprehensive income that includes that gain or loss;

(IFRS 5: para. 41)

Example: Classification of a discontinued operation

The business produces ice creams, and a net profit analysis by the product group is prepared.

The Exotic Fruit range has done particularly badly over the last quarter because the business was unable to source an ingredient due to flooding in the country where our sole supplier of the ingredient is based. Directors have pointed out that if we stopped producing the Exotic Fruit range, we would be able to sell the fruit feeder machine that we use specifically for this range. Subsequently, the Exotic Fruit range was classified as held for sale. However, the Exotic Fruit range only accounts for 0.01% of the group’s revenue.

Required:

Whether the closure of the exotic fruit range qualifies a discontinued operation.

Answer:

A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale, and:

• It represents either a separate major line of business or a geographical area of operations; or
• It is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
• It is a subsidiary acquired exclusively with a view to resale, and the disposal involves loss of control.

Given those criteria we could not classify the discontinuation of the Exotic Fruit range as a “discontinued operation” because the range is a small percentage of our total business (0.01%) and would not, therefore, be deemed as a ‘major’ line of business. We also do not have a plan to dispose of any other product ranges at this time, therefore, the closures are not part of a plan to dispose of a separate major line of business or geographical area of operations.

The above disposal group should be measured per IFRS 5 as Non-current assets held for sale following the lower of its carrying value and the fair value less costs to sell on the reclassification date.

Example: Presentation and disclosure

There are three divisions that the business operates: A, B and C.

The following trial balance is available for these three divisions:

The income tax charge for the year includes $150,000 on continuing activities and $30,000 for discontinued activities.

During the year, the disposal loss of the asset for division B was $40,000. $80,000 was spent on restructuring divisions A&C when division B was terminated.

Required:

Prepare the statement of profit or loss for the discontinued operations per IFRS 5.

Answer:

Note 1: Restructuring cost:

This is a material item because of its unusual nature and should be presented as a separate item on the statement of profit or loss rather than included in operating expenses.

Note 2: Profit for the year from discontinued operations:

Disclosure note:

• During the year, the business closed down division B, and the results are separately disclosed. A loss on the asset disposal was $40,000 because of the operation is discontinued.
• Additionally, restructuring costs incurred were $80,000 to rationalise the remaining division A and C.

Exam rehearsal question – Moyes (Dec 2018 Q1 (c))

The directors of Moyes wish advice as to whether the disposal of Barham should be treated as a discontinued operation and separately disclosed within the consolidated statement of profit or loss. There are several other subsidiaries which all produce similar products to Barham and operate in a similar geographical area. Additionally, Moyes holds a 52% equity interest in Watson. Watson has previously issued share options to other entities which are exercisable in the year ending 30 September 20X9. It is highly likely that these options would be exercised which would reduce Moyes’ interest to 35%. The directors of Moyes require advice as to whether this loss of control would require Watson to be classified as held for sale and reclassified as discontinued.

Required:

Advise the directors as to whether Watson should be classified as held for sale and whether both it and Barham should be classified as discontinued operations.

(6 marks)

Answer:

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations defines a discontinued operation as a component of an entity which either has been disposed of or is classified as held for sale, and

(i) represents a separate major line of business or geographical area of operations;

(ii) is a single co-ordinated plan to dispose of a separate major line or area of operations;

(iii) is a subsidiary acquired exclusively for resale.

Sperate major line

Both entities would be components of the Moyes group since their operations and cash flows are clearly distinguishable for reporting purposes. Barham has been sold during the year but there appears to be other subsidiaries which operate in similar geographical regions and produce similar products. Little guidance is given as to what would constitute a separate major line of business or geographical area of operations.

The definition is subjective and the directors should consider factors such as materiality and relevance before determining whether Barham should be presented as discontinued or not.

Highly probable

To be classified as held for sale, a sale has to be highly probable and the entity should be available for sale in its present condition. At face value, Watson would not appear to meet this definition as no sales transaction is to take place.

Lost control

IFRS 5 does not explicitly extend the requirements for held for sale to situations where control is lost. However, the International Accounting Standards Board (the Board) have confirmed that in instances where control is lost, the subsidiaries’ assets and liabilities should be derecognised. Loss of control is a significant economic event and fundamentally changes the investor– investee relationship.

Therefore situations where the parent is committed to lose control should trigger a reclassification as held for sale. Whether this should be extended to situations where control is lost to other causes would be judgemental. It is possible therefore that Watson should be classified as held for sale.

In addition, in order to be classified as a discontinued operation, Watson would need to represent a separate major line of business or geographical area of operation.

Exam rehearsal question – Farham (Sept 2018)

Background

Farham manufactures white goods such as washing machines, tumble dryers and dishwashers. The industry is highly competitive with a large number of products on the market. Brand loyalty is consequently an important feature in the industry. Farham operates a profit related bonus scheme for its managers based upon the consolidated financial statements but recent results have been poor and bonus targets have rarely been achieved. As a consequence, the company is looking to restructure and sell its 80% owned subsidiary Newall which has been making substantial losses. The current year end is 30 June 20X8.

Sale of Newall

At 30 June 20X8 Farham had a plan to sell its 80% subsidiary Newall. This plan has been approved by the board and reported in the media. It is expected that Oldcastle, an entity which currently owns the other 20% of Newall, will acquire the 80% equity interest. The sale is expected to be complete by December 20X8. Newall is expected to have substantial trading losses in the period up to the sale. The accountant of Farham wishes to show Newall as held for sale in the consolidated financial statements and to create a restructuring provision to include the expected costs of disposal and future trading losses. The COO does not wish Newall to be disclosed as held for sale nor to provide for the expected losses. The COO is concerned as to how this may affect the sales price and would almost certainly mean bonus targets would not be met. The COO has argued that they have a duty to secure a high sales price to maximise the return for shareholders of Farham. She has also implied that the accountant may lose his job if he were to put such a provision in the financial statements. The expected costs from the sale are as follows:

• Future trading losses $30 million
• Various legal costs of sale $2 million
• Redundancy costs for Newall employees $5 million
• Impairment losses on owned assets $8 million

Included within the future trading losses is an early payment penalty of $6 million for a leased asset which is deemed surplus to requirements.

Required:

Discuss the accounting treatment which Farham should adopt to address the issue for the consolidated financial statements. (6 marks)

Answer:

The disposal of Newall appears to meet the held for sale criteria. Management has shown commitment to the sale by approving the plan and reporting it to the media. A probable acquirer has been found in Oldcastle, the sale is highly probable and expected to be completed six months after the year end, well within the 12-month criteria. Newall would be treated as a disposal group since a single equity transaction is the most likely form of disposal. Should Newall be deemed to be a separate major component of business or geographical area of the group, the losses of the group should be presented separately as a discontinued operation within the consolidated financial statements of Farham.

Assets held for sale are valued at the lower of carrying amount and fair value less costs to sell. The carrying amount consists of the net assets and goodwill relating to Newall less the non-controlling interest’s share. Assets within the disposal group which are not within the scope of IFRS 5 Assets Held for Sale and Discontinued Operations are adjusted for in accordance with the relevant standard first. This includes leased assets and it is highly likely that the leased asset deemed surplus to requirements should be written off with a corresponding expense to profit or loss. Any further impairment loss recognised to reduce Newall to fair value less costs to sell would be allocated first to goodwill and then on a pro rata basis across the other non-current assets of the group.

The chief operating officer is wrong to exclude any form of restructuring provision from the consolidated financial statements. The disposal has been communicated to the media and a constructive obligation exists. However, only directly attributable costs of the restructuring should be included and not ongoing costs of the business. Future operating losses should be excluded as no obligating event has arisen and no provision is required for the impairments of the owned assets as they would have been accounted for on remeasurement to fair value less costs to sell. The legal fees and redundancy costs should be provided for. The early payment fee should also be provided for despite being a future operating loss. This is because the contract is onerous and the losses are consequently unavoidable. A provision is required for $13 million ($2 million + $5 million + $6 million). The $6 million will be offset against the corresponding lease liability with only a net figure being recorded in profit or loss.

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