1 Introduction to IFRS 5
The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations.
This IFRS requires that:
- 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.
Asset held for sale
An asset (or disposal group) whose carrying amount will be recovered principally through sale rather than through usage of the asset.
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.
2 Classification as non-current asset held for sale
An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.
2.1 Criteria – important
To classify as held for sale the asset (or disposal group)
- must be available for immediate sale in its present condition; and
- its sale must be highly probable.
2.1.1 When the sale is considered highly probably?
For the sale to be highly probable, the appropriate level of management must be:
- committed to a plan to sell the asset (or disposal group), and
- an active programme to locate a buyer and complete the plan must have been initiated. Further,
- the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value.
- the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification,
- actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn
- The probability of shareholders’ approval (if required in the jurisdiction) should be considered as part of the assessment of whether the sale is highly probable.
Exception: Extension in period of sale beyond one year
Events and circumstances may cause the sale of asset to be delayed beyond one year. However, this will not prevent the entity to classify asset as held for sale if the events were beyond entity’s control and entity is still committed to sell the asset.
However this exception is only available if the events and circumstances causing delay are arisen in the following situations:
Expected conditions on transfer of asset
The date when sale of non-current asset was committed it was expected that parties other than buyer will impose condition on transfer of asset. To respond such conditions a firm purchase commitment is required which is highly probable within in one year
Unexpected conditions on transfer
A firm purchase commitment was obtained but still buyer or others imposed conditions on transfer of non-current asset. However, actions have been taken in response to conditions on timely basis and a favourable resolution to factors causing delay is expected
During initial one-year period unlikely situations have arisen due to which asset held for sale is not sold by the end of the period. However, necessary actions have been taken in response to changing circumstances and asset. The asset is still available for immediate sale is being actively marketed at a price reasonable in the changed circumstances and the sale is highly probable.
Sale transactions include exchanges of non-current assets for other non-current assets when the exchange has commercial substance in accordance with IAS 16 Property, Plant and Equipment.
2.2 Timing of classification
A non-current asset meant for subsequent disposal can be classified as held for sale at the date of acquisition ONLY IF:
- sale transaction is expected to complete within one year of such classification; and
- it is highly probable that if any other conditions of the criteria are not met at that date will be met within a short period following acquisition (usually within in three months)
That means relaxation can be given for other conditions for a short period of time if one-year requirement is fulfilled at the date of acquisition.
Criteria met after the reporting period
If the criteria are met after the reporting period, an entity shall NOT classify a non-current asset (or disposal group) as held for sale in those financial statements when issued.
However, when those criteria are met after the reporting period but before the authorisation of the financial statements for issue, the entity shall disclose (not classify) the following information:
- 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;
- if applicable, the reportable segment in which the non-current asset (or disposal group) is presented in accordance with IFRS 8 Operating Segments.
2.3 Non-current assets that are to be abandoned
An entity shall NOT classify as held for sale such non-current asset (or disposal group) that is to be abandoned. Non-current assets (or disposal groups) to be abandoned include:
- non-current assets (or disposal groups) that are to be used to the end of their economic life; and
- non-current assets (or disposal groups) that are to be closed rather than sold.
However, if the disposal group to be abandoned meets the definition of discontinued operation, the entity shall present the results and cash flows of the disposal group as discontinued operations at the date on which it ceases to be used.
In simple words non-current assets to be abandoned shall not be classified as held for sale but can be classified as discontinued operation.
A non-current asset that has been temporarily taken out of use cannot account for as abandoned.