for Accounting Professionals
IFRS 5 Non-current assets held for sale and discontinued operations
2011
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IFRS 5 Non-current assets held for sale and discontinued operations
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2011 Updated
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Non-current Assets Held for Sale and Discontinued Operations
1. Non-current Assets ‘held for sale’ and
Discontinued Operations - Introduction
CONTENTS
1. Non-current Assets ‘held for sale’ and
Discontinued
Operations –
Introduction
3
2. IFRS 5 - Impact for Banks
5
OVERVIEW
3. Classification of Non-Current Assets or Disposal
Groups as ‘Held for
Sale’
11
4. Measurement of Non-Current Assets or Disposal
Groups Classified as
‘Held for Sale’
13
5. Discontinued operations
18
6. Presentation and Disclosure
19
7. Multiple Choice Questions
23
8. Answers to Multiple Choice Questions
26
Aim
The aim of this workbook is to assist the individual in
understanding IFRS 5 Non-current Assets ‘held for sale’ and
Discontinued Operations according to IFRS.
Reasons for issuing IFRS 5
Separately highlighting the results of discontinued operations
provides users with information that is relevant in assessing the
ongoing ability of the bank to generate cash flows.
Providing information about assets and groups of assets and
liabilities to be disposed of is also of benefit to users. Such
information should assist them in assessing the timing, amount and
uncertainty of future cash flows.
Having ownership of an asset, its value is recovered by use, or by
resale, or both.
Whilst awaiting disposal, an asset may be in current use by the
bank.
If an asset is available for immediate sale, the remaining use of the
asset is incidental to its recovery through sale and the carrying
amount of the asset will be recovered principally through sale.
A distinction is drawn between an asset that is to be sold and an
asset that is to be abandoned, because the former will be
recovered principally through sale and the latter (an asset that is to
be abandoned) through its continuing use.
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Non-current Assets Held for Sale and Discontinued Operations
IFRS 5 sets out requirements for the classification, measurement
and presentation of non-current assets ‘held for sale’.
IFRS 5 arises from the IASB’s consideration of the U.S. based
FASB Statement No. 144 which addresses three areas:
(i)
the classification, measurement and presentation of
assets ‘held for sale’;
(ii)
the classification and presentation of discontinued
operations; and
(iii)
the impairment of long-lived assets to be held and used.
IFRS 5 achieves substantial convergence with the requirements of
SFAS 144 relating to assets ‘held for sale’, the timing of the
classification of operations as discontinued and the presentation of
such operations but not (iii) impairment of long-lived assets (see
IAS 36 workbook).
5
classifies an operation as discontinued at the date the
operation meets the criteria to be classified as held for sale or
when the entity has disposed of the operation.
6.
specifies that ‘held for sale’ assets and the net assets
included within a ‘held for sale’ disposal group, are presented
separately, on the face of the balance sheet (SFP).
7.
specifies that the results of discontinued operations are to be
shown
separately, on the face of the income statement.
8. prohibits retroactive classification of an operation as
discontinued.
IFRS 5 classifies an operation as ‘discontinued’, at the date the
operation can be classified as ‘held for sale’, or when the bank has
disposed of the operation.
Main features of IFRS 5
OBJECTIVE
IFRS 5:
1
uses the classification ‘‘held for sale’’.
2
introduces the concept of a ‘disposal group’, being a group of
net assets (assets and liabilities) to be disposed of, together
as a group, in a single transaction.
3
specifies that assets or disposal groups that are ‘held for sale’
are carried at the lower of:
carrying amount and
‘fair value, less costs to sell’.
4
specifies that an asset classified as ‘held for sale’, or
included within a disposal group that is ‘held for sale’, is not
depreciated.
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The objective of IFRS 5 is to specify the accounting for assets ‘held
for sale’ and the presentation and disclosure of discontinued
operations. In particular, IFRS 5 requires:
i
assets that meet the criteria are classified as ‘held for sale’
and measured at the lower of:
carrying amount and
‘fair value, less costs to sell’
and depreciation on such assets to cease;
ii
assets that meet the criteria are classified as ‘held for sale’
are to be presented separately, on the face of the balance
sheet. The results of discontinued operations are presented
separately in the income statement.
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Non-current Assets Held for Sale and Discontinued Operations
2. IFRS 5 - Impact for Banks
IFRS 5 has a specific relevance to banks in being used to account
for assets received in exchange for loans, when taking possession
of collateral.
EXAMPLE- taking possession of real estate due to loan default.
You loan money to a firm building flats. The firm provides the land
and the flats as collateral for the loan. Due to fraud, the firm does
not have enough money to complete the flats and is in breach of
the conditions of the loan.
You take possession of the land and the flats. You intend to sell
them, but need to complete construction in order to recover the
value of the loan and the unpaid interest. You account for them
under IFRS 5 – non-current assets held for sale.
EXAMPLE- Assets acquired in exchange for loans - HSBC plc
Annual Report 2005.
Non-financial assets acquired in exchange for loans in order to
achieve an orderly realisation are recorded as assets held for sale
and reported in ‘Other assets’.
The asset acquired is recorded at the lower of its fair value
(less costs to sell) and the carrying amount of the loan (net of
impairment allowance) at the date of exchange. No depreciation
is provided in respect of assets held for sale.
Any subsequent write-down of the acquired asset to fair value less
costs to sell is recorded as an impairment loss and included in the
income statement. Any subsequent increase in the fair value less
costs to sell, to the extent this does not exceed the cumulative
impairment loss, is recognised in the income statement.
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This use of IFRS 5 is to distinguish activities (and the non-current
assets involved) that are incidental to the bank’s main activity of
banking, and are of a temporary nature. (If a bank is continuously
involved in the construction industry, in a more active role than only
making loans, these activities would be considered part of its
normal trading.) The bank may then be subject to IAS 11.
EXAMPLE- Disposal group - acquired with a view for subsequent
disposal –HBOS plc 2006 financial statements.
The assets (1,388m) and liabilities (909m) of the disposal group
comprise those of the Mother Topco Limited group of companies.
Mother Topco Limited, a subsidiary undertaking in which the Group
had a 58.3% equity interest at 31 December 2006, is the vehicle
established to effect the purchase of McCarthy & Stone plc, a UK
provider of retirement homes.
The assets and liabilities were acquired with a view for subsequent
disposal.
It is highly probable that this disposal will occur within twelve
months of the acquisition date and, in accordance with IFRS 5,
'Non-current assets held for sale and discontinued assets', the
assets and liabilities are classified as a disposal group.
To qualify as assets held for sale under IFRS 5, the collateral that
is being repossessed must be non-current assets and meet the
IFRS 5 conditions detailed in this workbook. Otherwise, the assets
will be shown as current assets and not distinguished, unless they
comprise a disposal group (see below).
Financial instruments are measured as required by IFRS 9 and are
outside the scope of the measurement provisions of IFRS 5.
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Non-current Assets Held for Sale and Discontinued Operations
Example – Loans held for sale - Barclays plc 2006 financial
statements.
Loans held for sale: Financial instruments are measured as
required by IAS 39 (now IFRS 9) and are outside the scope of the
measurement provisions of IFRS 5.
Non-current assets that have been used by the business, but are
no longer needed by the business, may also be reclassified under
IFRS 5 if they qualify:
Example – disposal of property – HSBC plc 2006 financial
statements.
“As a consequence of inviting proposals for a sale and leaseback
of 8 Canada Square, London, under an operating lease
arrangement, the property has been reclassified as a non-current
asset held for sale after 31 December 2006.
On 7 February 2007 the Group announced the proposed sale of its
life, investment and pensions subsidiaries, Nationwide Life Limited
and Nationwide Unit Trust Managers Limited to Legal & General.
Consequently, the assets and liabilities of these undertakings are
disclosed separately as required by IFRS 5.
The proceeds of disposal are expected to exceed the carrying
value of the related net assets and, accordingly, no losses have
been recognised.
The major assets and liabilities of these undertakings are as
follows:
This is in accordance with IFRS 5 ‘Non-current Assets Held for
Sale and Discontinued Operations’.
The reclassification was made at carrying value, with no financial
impact on the income statement. At 31 December 2006, the
carrying amount of the property, included in ‘Property, plant and
equipment’, was US$742 million and the carrying amount of the
long leasehold land, included in ‘Prepayments and accrued
income’, was US$210 million.
Balance sheet (SFP)
The building and leasehold interest are included in the assets of
the Europe geographical segment and the ‘Other’ customer group
segment.”
Banks will also use IFRS 5 for its discontinued operations:
Example - Assets classified as held for sale and associated
liabilities - Nationwide Annual Report And Accounts 2007.
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2007
£m
2006
£m
198.8
1,909.6
288.2
2,396.6
-
Assets
Loans and advances to banks
Insurance assets at fair value
Other assets
Total assets held for sale
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Non-current Assets Held for Sale and Discontinued Operations
Liabilities
Deposits from banks
Insurance contract liabilities
Other liabilities
Total liabilities directly associated with assets
classified as held for sale
875.0
1,178.0
37.7
2,090.7
-
In other cases, discontinued businesses may be considered not to
be material and they are not shown separately, as in the following
two examples:
Example – Profit on sale and closure of businesses - Lloyds TSB
Group 2006 financial statements.
“The businesses sold in 2005 were not material to the Group, and
consequently they have not been treated as discontinued
operations.“
and
Example – discontinued businesses– Barclays plc 2006 financial
statements.
“Head office functions and other operations comprises
discontinued businesses in transition.“
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Non-current Assets Held for Sale and Discontinued Operations
Property type- different accounting treatment applied to properties under IFRS depending on their current and future uses and
their ownership
Standard
Standard Name
Valuation
Owner-occupied property
IAS 16
Property, plant and equipment
(see also IAS 20 Government grants)
Cost or revaluation.
Property acquired in an exchange of
assets
Investment property
Investment property being redeveloped
for continuing use as investment property.
Investment property held for sale without
development (unless it meets the criteria
of IFRS 5 – see below).
Property held under an operating lease
classified as an investment property
Property held under a finance lease
IAS 16
Property, plant and equipment
IAS 40
IAS 40
Investment property
Investment property
Fair value or the carrying amount of the assets traded
/ exchanged.
Cost or fair value.
Cost or fair value.
IAS 40
Investment property
Cost or fair value.
IAS 40
Investment property
IAS 17
Property held under an operating lease –
owner -occupied
Property lease to another party under a
finance lease
Property sale and leaseback
Trading properties – property (including
investment property) intended for sale in
the normal course of business or being
built or developed for that purpose
Property held for sale, or included in a
disposal group that is held for sale.
Assets received in exchange for loans
(taking possession of collateral)
IAS 17
Leases. Owner-occupied IAS 16,
Investment property IAS 40.
Leases
Fair value (accounted for as a finance lease under IAS
17).
The lower of fair value and the present value of the
minimum lease payments.
Leasing costs expensed.
IAS 17
Leases
IAS 17
IAS 2
Leases
Inventories (Properties held for sale that meet the
criteria of IFRS 5 should be recorded according to
IFRS 5 – see below. These are generally not in the
normal course of business.)
Non-current assets held for sale and
discontinued operations
Non-current assets held for sale and
discontinued operations
Property, plant and equipment (see Property
acquired in an exchange of assets above)
Construction contracts
IFRS 5
IFRS 5
IAS 16
Property provided as part of a
construction contract
Future costs of dismantling, removal and
site restoration.
IAS 11
IAS 37
Provisions, contingent liabilities and contingent
assets (see also IFRIC 1, IFRIC 5)
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Account receivable equal to the net investment in the
lease.
As operating lease or finance lease, as appropriate
Lower of cost and net realisable value.
Lower of carrying amount and fair value less costs
to sell.
Lower of fair value less costs to sell and carrying
amount of the loan net of impairment at the date of
exchange.
(see HSBC plc Annual Report 2005 page 247)
Stage of contract completion or cost.
Present value of the expected costs, using a pre-tax
discount rate.
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Non-current assets held for sale and discontinued operations
Notes to the table on the previous page.
SCOPE
Note 1: Where an asset is revalued, increases in carrying
amounts above cost are recorded as revaluation surplus,
in equity.
Using fair values, all changes in fair value are recorded
in the income statement.
Reductions below cost are recorded in the income
statement under both methods.
IFRS 5 is one of several standards that apply to property. The
table above identifies IFRS 5 uses and valuations of property. In
this context, IFRS 5 is close to IAS 2 (Inventories).
Note 2. In the cases where the asset is subject to cost or
revaluations, the carrying value will be reduced by
accumulated depreciation and accumulated impairment
(see IAS 36 workbook).
IFRS 5 is used when the sale of property is not the main
business. In the case of financial institutions, their normal
business is to provide loans, though in some cases, the bank will
receive assets that were collateral for the loans.
The table above identifies the different accounting treatment
applied to properties under IFRS depending on their current and
future uses and their ownership.
IFRS 5 applies to all non-current assets and to all disposal
groups, except for those assets listed below, which continue to
be measured in accordance with the Standard noted.
Workbooks are available on our website on each standard that
explain each accounting treatment with examples.
Sometimes, a bank disposes of a group of net assets in a single
transaction. This is known as a disposal group. A disposal
group that was part of a cash-generating unit becomes a
separate cash-generating unit.
The calculations and presentations of Non-current Assets ‘held
for sale’ and Discontinued Operations are intended to help the
reader of financial statements to distinguish between:
(i)
the results of activities that will continue to be part of
the bank, and the assets and liabilities that support
them, and
(ii)
the results of activities that have ceased (or will soon
cease) to be part of the bank and the assets and
liabilities that will no longer be part of the bank.
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IAS 2 is used when trading properties is the main business of a
bank, and the properties are being sold in the normal course of
business.
The group may include current assets, current liabilities and
assets excluded from the requirements of IFRS 5.
If a non-current asset is part of a disposal group, IFRS 5 applies
to the group as a whole. The group is measured at the lower of:
- its carrying amount; and
-‘fair value, less costs to sell’.
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Non-current assets held for sale and discontinued operations
IFRS 5 does not apply to the following assets, which are covered
by the Standards listed, either as individual assets or as part of a
disposal group:
i
deferred tax assets - IAS 12 Income Taxes.
finance costs and income tax
expense.
current asset
ii
assets arising from employee benefits - IAS 19 Staff
Benefits.
iii
financial assets within the scope of IFRS 9 Financial
Instruments.
iv
ii
it is held for the purpose of
being traded;
non-current assets, that use the fair value model in IAS 40
Investment Property (see Table above).
v
non-current assets, that are measured at ‘fair value, less
costs to sell’, in accordance with IAS 41 Agriculture.
vi
contractual rights under insurance contracts as defined in
IFRS 4 Insurance Contracts.
An asset that satisfies any of the
following criteria:
i
it is expected to be realised in
cash or is intended for sale or
consumption in the bank’s normal
operating cycle;
iii
it is expected to be realised
within twelve months after the
balance sheet date; or
iv
it is cash or a cash equivalent
asset that can be used within twelve
months after the balance sheet date.
Defined terms
discontinued operation
cash-generating unit
The smallest identifiable group of
assets that generates cash inflows,
independent of the cash inflows from
other assets.
component of a bank
Operations and cash flows that can
be clearly distinguished operationally
and for financial reporting, from the
rest of the bank.
costs to sell
The incremental costs, directly
attributable to the disposal of an
asset or disposal group, excluding
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A component of a bank that 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 part of a single co-ordinated
plan to dispose of a separate major
line of business or geographical area
of operations or
iii
is a subsidiary, acquired
exclusively with a view to resale.
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Non-current assets held for sale and discontinued operations
disposal group
date of classification
fair value
firm purchase
commitment
highly probable
A group of net assets to be disposed
of by sale or otherwise together as a
group, in a single transaction. It may
include goodwill.
Date of classification of long term
assets or disposal group as held for
sale.
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. (IFRS 13)
An agreement with an unrelated
party, binding on both parties, that
specifies all significant terms,
including the price and timing of the
transactions and includes a
disincentive for non-performance, that
is sufficiently large to make
performance highly probable.
Significantly more likely than
probable.
non-current asset
As asset that is not a current asset.
probable
More likely than not.
recoverable amount
The higher of an asset’s ‘fair value,
less costs to sell’ and its value in
use.
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value in use
The present value of cash flows from
the continuing use of an asset and
from its disposal.
3. Classification of Non-Current Assets or Disposal Groups
as ‘Held for Sale’
1. Non-current assets or disposal groups are classified as ‘held
for sale’, if their carrying amount will be recovered through a sale
transaction.
A demerger where the shares are given to the group’s
shareholders does not qualify as a sale. (However, it may be a
discontinued operation from the date of demerger.)
EXAMPLE- carrying amount will be recovered through a sale
transaction.
You decide to sell a computer. Its carrying value will be matched
by sale proceeds, rather than service within your bank. Future
cash flows will come from the sale of the computer rather than
from operations.
2. The asset or disposal group must be available for immediate
sale in its present condition and its sale must be highly probable.
EXAMPLE- available for immediate sale.
You wish to sell some mining equipment acquired as collateral
that is in a disused mine. To be available for immediate sale, if
will have to be brought to the surface.
3. The management must be committed to a plan to sell the asset
or disposal group and have an active programme to locate a
buyer.
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Non-current assets held for sale and discontinued operations
4. The asset or disposal group must be actively marketed for
sale.
If the criteria are met after the balance sheet date, but before the
approval of the financial statements for issue, the information
should be included in the notes.
EXAMPLE- plan to sell the asset.
Your board has decided to sell a division. Consultants have been
hired to provide a sales plan. The division is not yet ‘held for sale’
as there is no plan to which management can be committed, nor
is there any marketing.
EXAMPLE-decision after the balance sheet date.
Your year ends in December. You decide so sell a division in the
following January. Your financial statements are approved in
March. You do not change your classifications, but disclose the
information in the notes (see IAS 10 workbook).
5. The sale should be expected to be completed within one year
from the date of classification. It should be unlikely that significant
changes to the plan will be made or that the plan will be
withdrawn.
As a result of an acquisition, a bank acquires a non-current asset
or disposal group exclusively with a view to its subsequent
disposal. (Normally only part of an acquisition will be sold.)
Circumstances may extend the period to complete the sale
beyond one year.
It shall classify the non-current asset, or disposal group, as ‘held
for sale’ at the acquisition date, only if the one-year requirement
is met.
EXAMPLE- completed within one year.
Your board has decided to sell a division. Markets are depressed
and the division will only be sold when a minimum price is
secured. The division is not yet ‘held for sale’ as no time
commitment has been made.
EXAMPLE- acquisition with a view to its subsequent disposal.
You buy a competitor’s global business. You will keep the
Russian business but will sell its operations in Africa. The African
operations are acquired as part of the overall purchase with a
view to its subsequent disposal. They may be ‘held for sale’.
6. Sale transactions include exchanges of non-current assets for
other non-current assets.
Non-current assets that are to be abandoned
EXAMPLE-exchanges.
You are buying a computer and plan to offer a computer, in part
exchange. The old computer can be ‘held for sale’.
A non-current asset or disposal group to be abandoned are not
classified as ‘held for sale’. Its carrying amount will be recovered
through continuing use.
7. The held for sale criteria must be met at the balance sheet
date, not after.
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Non-current assets held for sale and discontinued operations
EXAMPLE-abandoned asset.
A client owns a mine. When the minerals are exhausted, the
client will abandon the mine. All income will come from the
minerals. It is not ‘held for sale’.
Although an abandoned asset (or one that will be abandoned in
the future) will not be ‘held for sale’, it may form a disposal group
and a discontinued operation at the date it ceases to be used.
If the disposal group to be abandoned:
i
represents a separate major line of business or
geographical area of operations,
ii
is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of
operations or
iii
is a subsidiary, acquired exclusively with a view to resale,
A non-current asset which has been temporarily taken out of use
has not been abandoned.
4.
Measurement of Non-Current Assets or Disposal
Groups Classified as ‘Held for Sale’
Measurement of a non-current asset or disposal group
Non-current assets and disposal groups classified as ‘held for
sale’ are measured at the lower of its:
-carrying amount; and
-‘fair value, less costs to sell’.
EXAMPLE- lower of its carrying amount and ‘fair value, less costs
to sell’.
The carrying amount of your computer is 100. You will sell it, but
the net proceeds will only be 90. Its value should be reduced to
90.
the results and cash flows of the disposal group are represented
as ‘discontinued operations’ at the date on which it ceases to be
used.
If newly acquired assets, or a disposal group, are ‘held for sale’,
they will be measured at the lower of cost and ‘fair value, less
costs to sell’.
EXAMPLE- abandoned group.
As part of a sale of a division, one operation will be closed, with
no assets sold outside the group. This operation will not be ‘held
for sale’, but it will be part of ‘discontinued operations’.
EXAMPLE- lower of cost and ‘fair value, less costs to sell’.
You buy a group of cash machines. One machine costs you 150,
but you will resell it for 180.
You value the machine at 150
Non-current assets to be abandoned are those to be used to the
end of their economic life and those that are to be scrapped, or
closed, rather than sold.
If the asset or disposal group is acquired as part of a business
combination, it shall be measured at ‘fair value, less costs to sell’,
Cost = fair value, as calculated in a combination, and therefore
cost can be used in place of fair value in such a case (see IFRS 3
workbook).
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Non-current assets held for sale and discontinued operations
EXAMPLE- asset from business combination- ‘fair value, less
costs to sell’.
You buy a group of businesses. You will sell one. It cost 130, as
part of the purchase. The selling price will be also 130. Sale costs
will be 10, so ‘fair value, less costs to sell’ will be 120 (130-10).
When the sale is expected to occur beyond one year, the costs to
sell are measured at present value.
Any increase in the present value of the costs to sell that arises
from the passage of time is recorded as a financing cost.
Immediately before the initial classification of the asset or
disposal group, as ‘held for sale’, the carrying amounts are
measured in accordance with applicable IFRS’s.
EXAMPLE-review of carrying amounts before the initial
classification.
You are about to sell a division. Investment property is included.
You have revalued it before. It should be revalued again before it
is classifying it as ‘held for sale’ (see IAS 40 workbook).
On subsequent re-measurement of a disposal group, the carrying
amounts of any assets and liabilities that are outside IFRS 5, will
be reviewed before the ‘fair value, less costs to sell’ of the
disposal group is remeasured.
Thus, inventory, accounts receivable, finance leases and current
liabilities will all be brought up to date before the remeasurement.
In the disposal group are inventory and accounts receivable.
Provisions for obsolete inventory and doubtful debts should be
reviewed before the disposal group’s ‘fair value, less costs to sell’
is remeasured.
Recognition of impairment losses and reversals
Impairment losses are recorded for any initial or subsequent
write-down of the asset, or disposal group, to ‘fair value, less
costs to sell’.
Subsequent increase in ‘fair value, less costs to sell’ are recorded
as a gain up to a limit of the cumulative impairment recorded in
accordance with IFRS 5,
or IAS 36.
EXAMPLE-reversal of impairment loss.
Your building has a carrying value of 100. In year 1 you have an
impairment loss of 10, so you reduce the carrying value to 90.
You decide to sell it and the
‘fair value, less costs to sell’ is 105.
You can only increase the value to 100, as this is reversing the
impact of the impairment loss. No higher amount can be used.
The impairment loss or any subsequent gain recorded for a
disposal group shall reduce, or increase, the carrying amount of
only the non-current assets within the group.
EXAMPLE- impairment loss-disposal group.
The ‘fair value, less costs to sell’ of a disposal group falls by 50.
The group contains current assets and non-current assets. The
loss must be applied to the non-current assets.
EXAMPLE-review of carrying amounts of assets outside IFRS 5.
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Non-current assets held for sale and discontinued operations
A gain or loss not previously recorded, by the date of the sale of
a non-current asset, or disposal group, shall be recorded at the
date of derecognition (when it is written out of the balance sheet).
This may occur if you have valued an asset anticipating that it will
be sold, and then find that you will be unable to sell it.
EXAMPLE- loss not previously recorded.
In your disposal group, there is an asset worth 60. The buyer
refuses to buy this asset, which is then sold for scrap, for 5. The
55 reduction in value shall be recorded at the date of sale of the
disposal group.
Requirements relating to derecognition (when it is written out of
the balance sheet) are set out in:
i
IAS 16 for property, plant and equipment and
ii
IAS 38 for intangible assets.
Non-current assets are not depreciated nor amortised while
classified as ‘held for sale’. Their value is remeasured at the
end of each period (the lower of:
its carrying amount and ‘fair value, less costs to sell’) and
any impairment is recorded.
The main reason that they are neither depreciated nor amortised
is that their carrying amounts are to be realised in sale proceeds,
not in the bank’s continuing operations.
EXAMPLE- not depreciate a non-current asset, classified as ‘held
for sale’ - 1
You have created a ‘held for sale’ disposal group. It is valued at
‘fair value, less costs to sell’. You stop all depreciation of noncurrent assets from the moment it is classified as ‘held for sale’.
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EXAMPLE- not depreciate a non-current asset, classified as ‘held
for sale’ – 2
Depreciation of an asset begins when it is available for use. That
is when the asset is in the location and condition necessary for it
to be capable of operating in the manner intended by
management.
Depreciation of an asset ceases at the earlier of when the asset
is classified as held for sale or is when the asset is derecognised
[IAS16].
Question
Should management continue to provide depreciation when a
factory is held for sale?
Background
A client owns several factories. Management decides to close
one of them and classify it as held for sale because of a fall in
demand for one of the product lines. The criteria for this factory to
be classified as held for sale are met for this factory.
Management provides depreciation on the factory using the
straight-line method.
Solution
No, management should not continue to provide depreciation on
the factory. It is classified as held for sale in accordance with
IFRS 5.
Interest and other expenses attributable to the liabilities of a
disposal group classified as ‘held for sale’ shall continue to be
recorded.
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Non-current assets held for sale and discontinued operations
EXAMPLE- Interest attributable to the liabilities of a disposal
group classified as ‘held for sale’ shall continue to be recorded.
Your disposal group includes interest charges from leased
equipment. This is charged to the disposal group.
Changes to a plan of sale
Assets classified as ‘held for sale’ cease to be classified if the
criteria are no longer met.
EXAMPLE-no longer ‘held for sale’.
You try to sell your insurance division. After 6 months (in July),
you take it off the market.
From July, it is no longer classified as ‘held for sale’.
Non-current assets that cease to be classified as ‘held for sale’
are measured at the lower of:
i
carrying amount before the assets or disposal group was
classified as ‘held for sale’.
ii
recoverable amount at the date of the subsequent decision
not to sell.
EXAMPLE-no longer ‘held for sale’ valuation 2.
The valuation of the disposal group is 950 (see part 1 above).
Having decided not to sell the division, its assets will be merged
with another division though some will be scrapped.
The assets that will be transferred will total 800. Those that will
be scrapped will earn 20.
The recoverable amount will be 820 (800+20).
As this is lower than the valuation of the disposal group, it will be
used as the new measurement. The loss of 130 (950-830) will be
accounted for as a loss on disposal of the scrapped items.
If the non-current asset is part of a cash-generating unit, its
recoverable amount is the carrying amount after the allocation of
any impairment loss under IAS 36.
This is adjusted for any depreciation, amortisation or revaluations
that would have been recorded, had the asset or disposal group
not been classified as ‘held for sale’
EXAMPLE- impairment loss, arising on a cash-generating unit.
A cash generating unit suffers an impairment loss of 2.000, of
which 150 is allocated to a non-current asset.
EXAMPLE-no longer ‘held for sale’ valuation 1.
The value of your disposal group is 1.000.
If it had not been held for sale, it would have depreciated by 50.
The non-current asset’s carrying value is 600,which is reduced to
450 (600-150) accounted for as additional depreciation to adjust
for the impairment loss allocation.
Depreciation is not charged while assets are ‘held for sale’.
It ceases to be ‘held for sale’. The additional depreciation of 50
must now be charged.
The revised valuation will be 950 (1000-50).
An adjustment to the carrying amount of a non-current asset, that
ceases to be classified as ‘held for sale’, is recorded as an
expense against income from continuing operations in the period
in which the criteria are no longer met.
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Non-current assets held for sale and discontinued operations
EXAMPLE-no longer ‘held for sale’ adjustments 3.
The value of your disposal group is 3.000.
EXAMPLE-no longer a disposal group.
You sell all non-current assets from your disposal group. The
remaining current assets and liabilities are outside the scope of
IFRS 5, and must be reclassified as continuing operations (they
are not shown separately).
The disposal group has ceased to exist.
If it had not been held for sale, it would have generated 125 in
additional depreciation. Depreciation is not charged while assets
are ‘held for sale’.
If it ceases to be ‘held for sale’, the 125 will be charged to
continuing operations.
If the asset had been revalued before classification as ‘held for
sale’, the adjustment shall be treated as a revaluation increase or
decrease.
EXAMPLE-no longer ‘held for sale’ adjustments 4.
Your asset was revalued from 1.400 to 1.600, when it became
‘held for sale’. The revaluation of 200 is credited to the
revaluation reserve in equity. (See IAS 16 and IAS 38
workbooks.)
It will not be sold and ceases to be ‘held for sale’. It is revalued at
1525.
The 75 (1600-1525) reduction is treated as a revaluation
decrease. This reduces the revaluation reserve in equity, but has
no impact on the income statement.
If an individual asset or liability is removed from a ‘held for sale’
disposal group, the remaining net assets are measured as a
group, only if the group meets the criteria.
The remaining non-current assets of the group that individually
meet the ‘held for sale’ criteria are measured individually at the
lower of their carrying amounts and ‘fair values, less costs to sell’.
EXAMPLE-no longer a disposal group.
You sell most of the non-current assets from your disposal group
on September 15th. The remaining “held for sale" current nonassets will be measured individually at the lower of their carrying
amounts and ‘fair values, less costs to sell’, on September 15th.
Any non-current assets that do not meet the criteria cease to be
classified as ‘held for sale’ and must be reclassified as continuing
operations after the adjustments detailed above (they are not
shown separately).
Any gain or loss on the remeasurement of a non-current asset (or
disposal group) classified as held for sale that does not meet (or
no longer meets) the definition of a discontinued operation shall
be included in profit or loss from continuing operations.
Extension of the period required to complete a sale
An extension required to complete a sale does not preclude an
asset or disposal group from being classified as ‘held for sale’.
The one-year limit may be extended in the following situations:
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Non-current assets held for sale and discontinued operations
1
if there is a reasonable expectation that others (not the
buyer) will impose conditions on the transfer of the asset
or disposal group and
the actions necessary to respond to those conditions
cannot be initiated, until after a firm purchase commitment
is obtained and
ii
a firm purchase commitment is highly probable within one
year.
EXAMPLE-conditions imposed on the transfer.
You attempt to sell a foreign subsidiary. The foreign government
blocks the sale, and refuses to recognise the new owners.
You know that it will take more than a year to resolve these
bureaucratic issues, but no firm purchase commitment will be
made until they are resolved.
For the one-year limit to be extended, there must be an
expectation that a firm purchase commitment is highly probable
within one year.
2
The firm purchase commitment includes conditions (buyer
or others) that will extend the period required to complete
the sale and:
You sell a group of mines, obtained as collateral from a client
who defaulted on a loan. The buyer insists on geological and
environmental surveys that will take more than a year to
complete. The sale will be delayed by this action.
3
The non-current asset or disposal group that is ‘held for
sale’ remains unsold at the end the initial one-year period
and
i
during this period, the bank took action to respond to the
change in circumstances,
ii
the non-current asset or disposal group is being actively
marketed at a reasonable price.
EXAMPLE-changes in circumstances
You have been trying to sell a division to a buyer. The buyer has
been delaying the sale, as the buyer is having financial difficulties
(unknown to you).
The buyer goes into liquidation after 10 months of negotiation.
You actively market the sale of the division to new clients at a
reasonable price, but are unable to secure the purchase within
one year.
i
timely actions necessary to respond to the conditions have
been taken and
Exchange Differences
IAS 21 deals with the impact of foreign exchange differences and
translation differences relating to IFRS 5 transactions (see IAS 21
workbook).
ii
a favourable resolution of the delaying factors is expected.
5. Discontinued operations
EXAMPLE-firm purchase commitment conditions
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Many groups change their composition by acquisitions, disposals
or both.
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Non-current assets held for sale and discontinued operations
Discontinued operations highlight the material parts of groups
that are to be (or have been) sold, exchanged, or demerged.
Abandoned non-current assets and disposal groups may also be
reported as discontinued operations, if they are material to the
group’s results.
Users wish to distinguish between the parts of the group that will
continue operationally and those parts that will be, or have been,
eliminated from the group in order to forecast the profits and cash
flows for future periods.
Material changes in the composition of the group may decrease
(or increase) the risks of the group’s business.
Providing information about ‘held for sale’ assets and
discontinued operations provides relevant information on which
users can base decisions.
A discontinued operation is a component that either has been
disposed of, or is classified as ‘held for sale’ and
i
Discontinued operations may also include abandoned assets
(see above) and represents a separate major line of business or
geographical area of operations, even though they will not have
been classed as ‘held for sale’ (as explained in the section on
abandonment above).
EXAMPLES– discontinued operations
You decide to sell your branch network. It is classified as ‘held
for sale’ following the necessary steps to market it. As a separate
major line of business, it will be classified and reported as a
discontinued operation, separately from continuing operations.
You buy a Russian banking group which also has operations in
the Ukraine. You decide at the time of purchase of the group that
the Ukraine operation will be sold, and commence marketing it.
As a subsidiary acquired exclusively with a view to resale, it will
be classified and reported as a discontinued operation,
separately from continuing operations.
represents a separate major line of business or
geographical area of operations;
6. Presentation and Disclosure
ii
is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of
operations; or
A bank shall present and disclose information that enables users
to evaluate the financial effects of discontinued operations and
disposals of non-current assets (or disposal groups).
iii
is a subsidiary, acquired exclusively with a view to resale.
Presenting discontinued operations
Therefore, a discontinued operation may still be trading within the
group on the date of the financial statements, but its disposal is
imminent.
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Disclosure
A bank shall disclose:
19
Non-current assets held for sale and discontinued operations
1
i
ii
a single amount on the face of the income statement
(statement of comprehensive income), comprising the total
of:
the post-tax profit of discontinued operations and
the post-tax gain or loss recorded 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.
2
an analysis of the single amount in 1(above) into:
i
the revenue, expenses and pre-tax the income statement
of discontinued operations;
ii
the related income tax expense (see IAS 12 workbook);
iii
the gain or loss recorded 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;
and
iv
the related income tax expense (IAS 12).
The analysis may be presented in the notes, or on the face of the
income statement.
If it is presented on the face of the income statement, it shall be
presented in a section identified as ‘discontinued operations’,
separately from continuing operations.
The analysis is not required for newly-acquired subsidiaries that
are ‘held for sale’ on acquisition.
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3
the net cash flows attributable to the operating, investing
and financing activities of discontinued operations.
These disclosures may be presented either in the notes, or on
the face of the financial statements. These disclosures are not
required for newly-acquired subsidiaries that are ‘held for sale’ on
acquisition.
Disclosures for the period presented cover all operations that
have been discontinued. This may mean representation prior
disclosures.
If there has been extra income, or expense, in this period,
relating to discontinued operations sold in a previous period, the
details will be listed.
i
the resolution of uncertainties that arise from the terms of
the disposal transaction, such as the resolution of purchase price
adjustments and indemnification issues with the purchaser.
ii
the resolution of uncertainties that arise from the
operations of the component before its disposal, such as
environmental and product warranty obligations retained by the
seller.
iii
the settlement of employee benefit plans obligations, if the
settlement is directly related to the disposal transaction.
If a bank ceases to classify a component as ‘held for sale’, the
results of operations of the component previously presented in
discontinued operations shall be reclassified and included in
income from continuing operations, for all periods presented. The
amounts for prior periods shall be described as having been represented.
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Non-current assets held for sale and discontinued operations
Gains or losses relating to continuing operations
results will not show these “Held for sale’ assets and liabilities in
previous periods.
Gains or losses remeasurement of a “held for sale” non-current
asset or disposal group is included as income from continuing
operations, provided that it is not a discontinued operation.
Additional disclosures
Presentation of a non-current asset or disposal group
classified as ‘held for sale’
Non-current assets and disposal groups classified as ‘held for
sale’ are shown separately from other assets in the balance
sheet.
The liabilities are classified as ‘held for sale’, are presented
separately from other liabilities, in the balance sheet. They are
not offset (assets minus liabilities) and presented as a single
amount.
The major classes of assets and liabilities classified as ‘held for
sale’ are separately disclosed either on the face of the balance
sheet, or 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, disclose in the
notes:
i
a description of the non-current asset or disposal group;
ii
a description of the circumstances of the sale and the
manner and timing of that disposal;
iii
the gain or loss and where, on the face of the income
statement, to find the figure that includes that gain or loss;
iv
if applicable, the segment in which the non-current asset
or disposal group is presented in accordance with IFRS 8
Operating Segments.
Cumulative income or expense recorded directly in equity,
relating to a non-current asset or disposal group classified as
‘held for sale’ requires separate disclosure.
In the period of the decision to change the plan to sell the noncurrent asset or disposal group disclose:
- a description of the circumstances leading to the decision
and
- the effect of the decision on the results of operations for
the period and any prior periods presented.
For a newly-acquired subsidiary that is ‘held for sale’ on
acquisition, disclosure of the major classes of assets and
liabilities is not required.
Discontinuing operation Illustrated example
(from Illustrative Corporate Financial Statements 2002, PwC)
“Held for sale’ assets and liabilities, that have been recorded for
the first time in the current period, will not be reclassified when
presenting prior-period information. Therefore the comparative
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On 31 January 2002, the Group publicly announced its intention
to sell the glass segment.
The subsidiary comprising this segment was sold on 30 June
2002 and is reported in these
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Non-current assets held for sale and discontinued operations
financial statements as a discontinuing operation. The sales,
results, cash flows and net assets of the glass segment were as
follows:
6 months
to 30 June
2002
Sales
Operating costs
Impairment of assets
Loss/profit from operations
Finance cost
Loss/profit before tax
Tax
Loss/profit after tax
Operating cash flows
Investing cash flows
Financing cash flows
Total cash flows
Property, plant and equipment
Current assets
Total assets
Total liabilities
Net assets
12 months
to 31 Dec
2001
12,200
13,688
300
1,788
585
2,373
783
1,590
765
1,832
1,639
572
20,225
15,356
–
4,869
1,258
3,611
1,192
2,419
5,670
3,514
1,338
3,494
At 30 June
2002
35,637
1,020
36,657
24,351
12,306
At 31 Dec
2001
39,119
7,375
46,494
31,428
15,066
determined as follows:
Net assets sold
Reclassifications from
shareholders’ equity
– currency translation differences
– goodwill previously written off to
equity
Proceeds from sale
Loss on disposal
Tax thereon –
After-tax loss on disposal
The net cash inflow on sale is
determined as follows:
Proceeds from sale
Less: cash and cash equivalents
in subsidiary sold
Net cash inflow on sale
12,306
354
1,245
12,946
959
959
12,946
497
12,449
Note – Non-current assets held for sale and discontinued
operations
(from Illustrative Corporate Financial Statements 2006, PwC)
The assets and liabilities related to Omikron (part of the manufacturing
and wholesale segment) have been presented as held for sale
following the approval of the Group’s management and shareholders
on 23 September 2006 to sell Omikron in Euravia.
The completion date for the transaction is expected by May 2007.
Operating cash flows
2006
300
2005
190
Investing cash flows
(103)
(20)
Financing cash flows
(295)
(66)
(98)
104
Total cash flows
The loss on disposal was
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Under this approach, the entity presents the cash
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Non-current assets held for sale and discontinued operations
flow statement as if no discontinued operation has
occurred.
It would also be acceptable to present the three
categories separately on the face of the cash flow
statement and present the line-by-line breakdown
of the categories, either in the notes or on the face
of the cash flow statement.
It would not be acceptable to present all cash
flows from discontinued operations in one line
either as investing or operating activity.
(a) Non-current assets classified as held for sale
220
-
(c) Analysis of the result of discontinued operations, and the result
recognised on the remeasurement of assets or disposal group.
(These disclosures can also be given on the face of the primary
financial statements.)
2006
2005
341
100
442
228
–
–
–
–
1,111
–
Disposal group held for sale:
 Property, plant and equipment
 Intangible assets
 Inventory
 Other current assets
Non-current assets held for sale:
 Property, plant and equipment
 Intangible assets
1,222
1,000
–
–
Total
2,222
3,333
–
–
(b) Liabilities directly associated with non-current assets classified as
held for sale
2006
2005
Trade and other payables
104
Other current liabilities
20
Provisions
96
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Revenue
Expenses
Profit from discontinued operations – before
tax
Tax
Profit from discontinued operations – after tax
Pre-tax gain/(loss) recognised on the
remeasurement of assets of disposal group
Tax
Gain/(loss) recognised on the remeasurement
of assets of disposal group – after tax
Profit for the year from discontinued
operations
2006
1,200
(960)
2005
1,150
(950)
240
(96)
144
200
(80)
120
(73)
29
–
–
(44)
–
100
120
7. Multiple Choice Questions
1. IFRS 5 covers:
(i)
(ii)
The classification, measurement and presentation of
assets ‘held for sale’.
The classification and presentation of discontinued
operations.
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Non-current assets held for sale and discontinued operations
(iii)
The impairment of long-lived assets to be held and
used.
6. A firm purchase commitment is an agreement, binding on
both parties, that:
(i)
1. i
2. ii
3 iii
4 i-ii
2. Assets that meet the criteria to be classified as ‘held for
sale’ are measured
1. Carrying amount.
2. ‘Fair value, less costs to sell’.
3. The lower of 1 and 2.
4. The higher of 1 and 2.
3. For assets that meet the criteria to be classified as ‘held
for sale’ depreciation on such assets:
1. Ceases.
2. Is reversed.
3. Is charged to discontinued operations.
4. Held for sale applies to:
1. Non-current liabilities.
2. Non-current assets.
3. Equity.
4. Current assets.
5. A disposal group, which was part of a cash-generating
unit:
1.Becomes a separate cash-generating unit.
2. Becomes a non-current asset.
3. Is ignored.
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(ii)
(iii)
1.
2.
3.
4.
5.
Specifies all significant terms, including the
price and timing of the transactions.
Includes a disincentive for non-performance,
which is sufficiently large to make
performance highly probable.
Is with an unrelated party.
i
ii
iii
i- ii
i- iii
7. Recoverable amount is an asset’s:
1. ‘fair value, less costs to sell’.
2. value in use.
3. The lower of 1 and 2.
4. The higher of 1 and 2.
8. For an asset to be held for sale,:
(i)
It must be available for immediate sale in its
present condition.
(ii)
Its sale must be highly probable.
(iii)
The management must be committed to a
plan to sell the asset.
(iv)
The management must have an active
programme to locate a buyer.
(v)
The asset must be actively marketed for
sale.
(vi)
The sale should be expected to be
completed within one year from the date of
classification.
24
Non-current assets held for sale and discontinued operations
(vii)
1.
2.
3.
4.
5.
6.
The asset should be fully depreciated.
i
ii
iii
i- v
i- vi
i – vii
9. When a bank acquires a non-current asset or disposal
group exclusively with a view to its subsequent disposal, it
shall classify the non-current asset or disposal group as
‘held for sale’ at the acquisition date, only if:
1. The one year requirement is met.
2. A buyer has been identified.
3. It will be sold at a premium to net assets.
10. If the criteria are met after the balance sheet date, a bank
shall:
1. Classify a non-current asset as ‘held for sale’ in those
financial statements.
2. When those criteria are met, after the balance sheet
date, but before the approval of the financial
statements for issue, the bank shall disclose the
information in the notes.
3. Classify a non-current asset as ‘discontinued
operations’ in those financial statements.
11. If the disposal group to be abandoned:
represents a separate major line of business or
geographical area of operations,
is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of
operations or
is a subsidiary, acquired exclusively with a view to resale,
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at the date on which it ceases to be used, the bank shall present
the results and cash flows of the disposal group as:
1. ‘Discontinued operations’.
2. ‘Held for sale’.
3. ‘Continuing operations’.
12. If a newly acquired asset is ‘held for sale’, the asset or
disposal group will be measured at:
1. Cost.
2. Fair value, less costs to sell’.
3. The lower of 1 and 2.
4. The higher of 1 and 2.
13. If the asset or disposal group is acquired as part of a
business combination, it shall be measured at:
1. Cost.
2. Fair value, less costs to sell’.
3. The lower of 1 and 2.
4. The higher of 1 and 2.
14.Subsequent remeasurement: Provisions for obsolete
inventory and doubtful debts should be reviewed:
1. Before the group’s ‘fair value, less costs to sell’ is
remeasured.
2. After the group’s ‘fair value, less costs to sell’ is
remeasured.
3. At the same time that the group’s ‘fair value, less costs
to sell’ is remeasured.
15. An adjustment, to the carrying amount of a non-current
asset that ceases to be classified as ‘held for sale’, is
recorded in:
1. Equity.
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Non-current assets held for sale and discontinued operations
2. Income from continuing operations.
3. Income from discontinued operations.
8. Answers to Multiple Choice Questions
Question
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Answer
4
3
1
2
1
5
4
5
1
2
1
3
2
1
2
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26