Selling a major asset or discontinuing a business operation are both huge strategic decisions an entity must make. Usually, these are not decisions that happen frequently, and, as a result, may not be a topic of concern that is continuously on the minds of most financial accountants. However, as the economy continues to change with rising interest rates and increased pressure on liquidity, making the strategic decision to discontinue operations or sell off an asset may become something we see a bit more often in the accounting world. The accounting for these events under IFRS 5 can have material impacts on the financial statements and complying with the standard can be complicated. With that in mind, this post offers an overview of the accounting for held-for-sale assets and discontinued operations under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. Let’s look at each in turn.
Non-current Assets Held for Sale
As stated in the video above, entities sell things in the normal course of business all the time. Those things are NOT considered assets held for sale within the scope of IFRS 5. You’ll also notice that the standard references “non-current” assets. As you can imagine, this also means that current assets (e.g., cash and equivalents, assets held for trading, assets sold or consumed in a normal operating cycle, etc.) are not within the scope of this guidance. So, what’s in scope? Non-current assets, such as buildings, vehicles, or licenses, if the carrying amount will be recovered principally through a sale transaction rather than through continuing use. So, in other words, non-current assets, when they are no longer able to be used in their typical fashion, may come within the scope of IFRS 5.
Classification of a non-current asset as held for sale is not an accounting policy choice! It is mandatory if the criteria for classification are met. There are two criteria that must BOTH be met:
- The asset is available for immediate sale: It is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets
- The sale is highly probable of occurring: For a sale to be highly probable of occurring, ALL of the following conditions must be present:
- The appropriate level of management is committed to a plan to sell the asset
- An active program to locate a buy and complete the plan has been initiated
- The asset is being actively marketed for sale at a price that is reasonable in relation to its fair value
- The sale is expected to qualify for recognition as a completed sale within one year from the date of classification
Immediately before the initial classification of the asset as held for sale, the carrying amounts of the asset are measured in accordance with applicable IFRS. That means that the asset is depreciated/amortized to its current carrying amount and any necessary impairment tests are performed! In other words, make sure the asset is marked to its true carrying amount BEFORE reclassification.
Once that is done, upon initial reclassification to held for sale, the non-current asset is remeasured to the LOWER of:
- Carrying value: This is the amount at which an asset is recognized after deducting any accumulated depreciation (amortization) and accumulated impairment losses.
- Fair value less costs to sell:
- Fair value is defined in IFRS 13 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense, which would not have been incurred by the entity had the decision to sell not been made.
Subsequently, no depreciation or amortization is recognized on assets classified as held for sale. These assets are tested for impairment annually or when triggers are present under IAS 36. The asset is remeasured each reporting period at the lower of the carrying amount or fair value less costs to sell until it is ultimately sold.
While it seems fairly straightforward, questions and complexities arise: What happens if the fair value less costs to sell exceeds the carrying value? What happens if the plan to sell changes? What if it extends beyond the 1 year period? How do you determine fair value? What is included in costs to sell? Looking for more answers…look no further than our eLearning course: IFRS 5: Held-for-Sale Assets.
IFRS 5 fundamentally changes the measurement and presentation of non-current assets and disposal groups that are classified as held for sale. A thorough understanding of when this change is triggered, how an entity measures these items, including required disclosures, are essential to properly account for held-for-sale assets in accordance with IFRS 5. And because these are non-recurring transactions, it is not something you encounter every day, so it's even more important to be ready to do it correctly when the time comes. Looking to understand the accounting and reporting of held-for-sale assets under IFRS? If so, then this CPE-eligible, eLearning course (1.0 CPE) has got you covered!
By the end of this course, you should be able to:
- Recall when non-current assets and disposal groups are classified as held-for-sale
- Determine how to measure and present in the financial statements non-current assets and disposal groups classified as held-for-sale
Overview and classification
Unlike assets held for sale, which can be as small as an individual non-current asset or as large as a disposal group, presentation of discontinued operation is reserved for larger, aggregated groups of an entity, defined as “components” in IFRS 5. Examples could include the disposal of a major geographic area or a major line of business.
In addition to being a component, the assets must be “held for sale” (or already have been disposed of during the reporting period) and meet one of three specified criteria:
- Represents a separate major line of business or geographical area of operations
- Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations
- Is a subsidiary acquired exclusively with a view to resale
IFRS 5 does not alter the measurement requirements specific to discontinued operations. In other words, upon qualifying as a discontinued operation, there are no required changes to measurement. However, a discontinued operation will generally include non-current assets (or disposal groups) held for sale, which require potential measurement adjustments upon being classified as held for sale. As a result, the measurement guidelines that may result in impairment could impact the results of a discontinued operation.
Once classified as a discontinued operation, an entity continues to recognize ongoing operating profits and losses from discontinued operations as they are incurred. The general prohibition on the accrual of future operating losses also continues to apply.
When a discontinued operation is disposed, any profit or loss on the sale is recognized in the period in which the sale is recognized.
Clearly, measurement is not the primary issue associated with discontinued operations. Instead, the key to reporting discontinued operations is in its presentation in the Statement of Comprehensive Income (i.e., Income Statement) and Statement of Cash Flows.
The results of discontinued operations are presented separately from continuing operations in the Statement of Profit or Loss and Other Comprehensive Income as a single amount of profit or loss. Amounts included in profit or loss from discontinued operations are presented separately from other comprehensive income (OCI) from discontinued operations.
One more thing to note: if an entity recognizes a new discontinued operation in the current year, comparative information is restated to include the same operations as discontinued in the comparative period. If an operation that was considered discontinued in the previous year is no longer considered discontinued in the current year, the previous year is restated to include this operation as a continuing operation!
Want to learn more about Discontinued Operations under IFRS 5? We have a CPE-eligible course for that too! Check out IFRS 5: Discontinued Operations.
Discontinued operations are not a recurring issue for most organizations. But, if they do occur, they must be properly identified and presented separately in the Statement of Comprehensive Income. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations sets out explicit requirements for the presentation of discontinued operations within your IFRS financial statements. What are these requirements? Well, you are about to find out in this CPE-eligible eLearning course (0.5 CPE)! This online course explores the accounting and reporting requirements for discontinued operations as set out in IFRS 5.
By the end of this course, you should be able to:
- Recall when and how an operation is presented as a discontinued operation
Bundle and save!
Finally, if you’re interested in taking both courses, you can save big…around 30%. Check out our bundled collection of both courses, IFRS 5: Held-for-Sale Assets and Discontinued Operations.
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