When a company (or another entity) plans to sell an asset and / or stop some part of its business, then it might affect its future cash flows, profitability and overall financial situation.
Therefore, the users of financial statements, mainly investors, should be informed about these events.
That’s why the standard IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations was issued – to highlight the results of discontinued operations and to separate them from the results of ongoing or continuing activities.
So, if you or your company plans to sell some non-current assets and discontinue some operations, then IFRS 5 is for you.
The only exception is when a company regularly sells assets normally considered as non-current. In this case, these sales represent one of primary activities and the related assets are inventories in fact. For example, a car dealer presents all vehicles for resale under IAS 2 Inventories, not under IFRS 5.
Let’s take a closer look to the main IFRS 5 rules.
Objective of IFRS 5
IFRS 5 focuses on 2 main areas:
- It specifies the accounting treatment for assets (or disposal groups) held for sale, and
- It sets the presentation and disclosure requirements for discontinued operations.
Let me point out that you should apply IFRS 5 for all non-current assets – no exception.
The standard IFRS 5 lists some measurement exceptions and you can read about them in the later paragraphs, but you still need to present and disclose the information about these assets under IFRS 5.
When to classify an asset as held for sale
You should classify a non-current asset as held for sale if its carrying amount will be recovered principally through a sale rather than continuing use.
The same applies for a disposal group.
Disposal group is a new concept introduced by IFRS 5 and it represents a group of assets and liabilities to be disposed of together as a group in a single transaction.
For example, when a company runs a few divisions and decides to sell one division, then all assets (including PPE, inventories, deferred tax, etc.) and all liabilities of that division would represent a disposal group.
What if we abandon an asset?
The question is whether you should classify a non-current asset as held for sale in the case when you plan to stop using it, or abandon it.
The answer is NO.
Why?
Because, you will recover its carrying amount through asset’s continuing use and not sale.
What does it practically mean?
Well, it means that you will NOT apply “held-for-sale accounting”, i.e. you will NOT keep an asset at lower of fair value less costs to sell and its carrying amount (as specified below).
But, it also means, that you WILL need to assess the criteria for presenting the abandoned asset or operation as discontinued operation.
When will an asset be recovered through a sale?
In other words, what are the conditions for classifying an asset as held for sale?
First of all, the asset or disposal group must be available for immediate sale in its present conditions and the sale must be highly probable.
IFRS 5 sets a few criteria for the sale to be highly probable:
- Management must be committed to a plan to sell the asset;
- An active program to find a buyer must have been initiated;
- The asset must be actively marketed for sale at a price reasonable to its current fair value;
- The sale is expected to be completed within 1 year from the date of classification;
- Significant changes to the plan are unlikely.
The similar criteria also apply to assets held for distribution to owners.
How to account for assets held for sale
Once you classify an asset or a disposal group as held for sale, then you should measure it under IFRS 5.
However, IFRS 5 lists a few measurement exceptions (IFRS 5.5):
- 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.
When you classify any of the above types of assets as assets held for sale, you continue measuring them under the same accounting policies as before classification (e.g. financial instrument held for sale will still be measured under IFRS 9, not IFRS 5).
Why have we classified these assets as held for sale though?
The reason is that although you don’t change their accounting treatment, you change their presentation and disclosures. You will still need to present these assets separately from others and disclose some additional information.
All other assets not excluded in the above list must be measured at lower of their carrying amount and fair value less costs to sell. That’s the main measurement principle of IFRS 5.
How to do it?
Measurement after classification
Immediately before you classify an asset as held for sale, you should measure it under applicable IFRS. For example, you would measure an item of property, plant and equipment under IAS 16.
Subsequently, after you classified an asset as held for sale, you should measure it at lower of its carrying amount and fair value less costs to sell (except for measurement exceptions listed above).
Impairment
With regard to any impairment, immediately before classification as held for sale, the impairment is recognized in line with the applicable IFRSs, for example, under IAS 36 for property, plant and equipment.
In this case, you would recognize any impairment loss in profit or loss, but sometimes also in other comprehensive income – that’s when you apply revaluation model for your property, plant and equipment and you have a revaluation surplus to decrease.
After you classify an asset as held for sale, you would recognize any impairment loss in profit or loss only.
What are discontinued operations
IFRS 5 specifies that you need to pay special attention to presenting any discontinued operation. But, what is it?
It is a component of an entity (understand: a cash-generating unit or a group of cash-generating units) that either has been disposed of or is classified as held for sale, and at the same time:
- Represents a separate major line of business or geographical area of operations,
- Is part of a plan to dispose it of, or
- Is a subsidiary acquire exclusively with a view to resale. (IFRS 5.32)
How to present discontinued operations
Once you identify a discontinued operation, you should present it separately from other continuing operations in your financial statements.
Thus, the readers of your financial statements will be able to see what you put away and what you keep going on in order to generate future profits and cash flows.
More specifically, you should present (IFRS5.33):
- In the statement of comprehensive income: a single amount comprising the total of:
- The post-tax profit or loss of discontinued operations, and
- The post tax gain or loss recognized on the measurement to fair value less costs to sell a or on the disposal of assets or disposal groups.
The analysis of a single amount shall be reported in the notes or in the statement of comprehensive income.
- In the statement of cash flows: the net cash flows attributable to the operating, investing and financing activities of discontinued operations. You can present these disclosures in the notes or in the financial statements themselves.
- In the statement of financial position (IFRS5.38): you shall present a non-current asset or assets of a disposal group classified as held for sale separately from other assets. The same applies for liabilities of a disposal group classified as held for sale.
Please watch the following video with a summary of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations:
