Recently one of our clients asked for training on accounting for the sale or disposal of a business under IFRS. Unfortunately, unlike most situations under IFRS where there is a specific standard for an accounting topic, there is not a specific standard for the topic of sale or disposal of a business. If it were instead the purchase of a business, it would be easy; IFRS 3 provides detailed guidance on business combinations. However, IFRS 3 doesn’t cover the opposite transaction, the sale of a business. Multiple standards need to be considered and multiple standards may need to be applied both to the “primary” accounting for the transaction and to consider other impacts from the transaction. This post helps explain how to navigate the standards and provides a brief summary of the accounting requirements.
Navigating the guidance that may be applicable can be broken down into four steps.
Step 1 – Should the sale or disposal group be presented separately as held for sale or discontinued operations?
IFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations applies to all non-current assets, or disposal groups of an entity that are considered held for sale, and to discontinued operations.
Before a sale or disposal transaction takes place, an entity must determine whether the non-current assets, or disposal group, meet the strict criteria to be classified as held for sale. If yes, then the non-current assets or disposal group are presented separately from other assets in the statement of financial position. Non-current assets that are not outside of the scope of the IFRS 5 measurement provisions, or a disposal group as a whole, are measured at the lower of current carrying value and fair value less costs to sell or distribute.
IFRS 5 also includes guidance on discontinued operations. Discontinued operations is a component of an entity that either has been disposed of or is classified as held for sale, and represents one or more of the following:
- A separate major line of business or geographical area
- Part of a plan to dispose of a separate line of business or geographical area, or
- A subsidiary acquired exclusively with a view to resale.
IFRS 5 defines a component of an entity as “operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.”
Discontinued operations require special presentation in the statement of comprehensive income as a single amount that comprises the post-tax profit or loss on discontinued operations, and the post-tax gain or loss on measurement to fair value less costs to sell.
Step 2 – How is the sale or disposal transaction structured?
This is where the issue of “no single standard” really comes up. While not outlined in IFRS, the structure of the transaction is the key driver of where to look for accounting guidance which, in turn, has an impact on the ultimate accounting including the calculation of any gain/loss on the sale. This is not driven by, as one might think, the definition of a business in IFRS 3. That only comes into play when purchasing, not selling. Really the key is whether the assets/liabilities being sold are held in a separate legal entity. If they are, then a subsidiary, or part of a subsidiary, is being sold and the “loss of control” guidance in IFRS 10, Consolidated Financial Statements, applies.
If the assets/liabilities being sold are not held in a separate legal entity, then the sale is just the sale of a group of assets and liabilities. In this case, the “usual” standards should be applied to each individual asset and liability being sold, for example:
- PPE – apply IAS 16
- Intangible asset(s) – apply IAS 38
- Financial instruments – apply IFRS 9
- Equity method investee – apply IAS 28
- Inventory – apply IAS 2
Step 3 – If sale of a subsidiary, when is control lost and how is it accounted for?
IFRS 10 contains guidance on the accounting for when a parent loses control of a subsidiary. Determining when control is lost requires application of the definition of control included in IFRS 10. Often control is lost when a parent sells all its shares in the subsidiary. However, sometimes a parent will sell part of a subsidiary, lose control, but retain some interest. IFRS 10 also includes guidance on this type of transaction. The steps to account for loss of control are summarized in this graphic:
IFRS 10 includes additional guidance on each of these steps. Be aware of issues that may complicate the application of this guidance such as when control is lost in two or more transactions, valuing non-cash or contingent consideration at fair value, and sale of a consolidated subsidiary that was not 100% owned.
Step 4 – Does any other guidance apply to the indirect effects of the transaction?
Additional accounting topics may arise in a sale or disposal transaction that may need to be considered, each of which have their own applicable accounting guidance, such as:
- Restructuring provisions (IAS 37)
- Onerous contracts (IAS 37)
- Termination benefits (IAS 19)
- Leases (IFRS 16)
- And many more!
In summary, several standards may apply to a sale or disposal of a business transaction. The first step is to navigate the standards, then determine which one(s) apply, and finally apply the guidance in each of the relevant standards.
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