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Main features of the IFRS standards 5
Main features of the IFRS standards 5: The Main Features Of IFRS 5 and Its Reasons for Issuing are detailed below:
- adopts the classification ‘held for sale’.
- introduces the concept of a disposal group, being a group of assets to bedisposed of, by sale or otherwise, together as a group in a singletransaction, and liabilities directly associated with those assets that willbe transferred in the transaction.
- specifies that assets or disposal groups that are classified as held for saleare carried at the lower of carrying amount and fair value less costs tosell.
- specifies that an asset classified as held for sale, or included within adisposal group that is classified as held for sale, is not depreciated.
Main features of the IFRS standards 5
The Reasons for Issuing IFRS 5 are detailed below:
- International Financial Reporting Standard 5Non-current Assets Held for Sale andDiscontinued Operations(IFRS 5) sets out requirements for the classification,measurement and presentation of non-current assets held for sale and replacesIAS 35Discontinuing Operations
- Achieving convergence of accounting standards around the world is one of theprime objectives of the International Accounting Standards Board. In pursuit ofthat objective, one of the strategies adopted by the Board has been to enter intoa memorandum of understanding with the Financial Accounting StandardsBoard (FASB) in the United States that sets out the two boards’ commitment toconvergence. As a result of that understanding the boards have undertaken ajoint short-term project with the objective of reducing differences between IFRSsand US GAAP that are capable of resolution in a relatively short time and can beaddressed outside major projects.
- One aspect of that project involves the two boards considering each other’srecent standards with a view to adopting high quality accounting solutions. TheIFRS arises from the IASB’s consideration of FASB Statement No. 144Accountingfor the Impairment or Disposal of Long-Lived Assets(SFAS 144), issued in 2001.
- SFAS 144 addresses three areas: (i) the impairment of long-lived assets to be heldand used, (ii) the classification, measurement and presentation of assets held forsale and (iii) the classification and presentation of discontinued operations.The impairment of long-lived assets to be held and used is an area in which thereare extensive differences between IFRSs and US GAAP.However, thosedifferences were not thought to be capable of resolution in a relatively shorttime. Convergence on the other two areas was thought to be worth pursuingwithin the context of the short-term project.
- The IFRS achieves substantial convergence with the requirements of SFAS 144relating to assets held for sale, the timing of the classification of operations asdiscontinued and the presentation of such operations.
Main features of the IFRS standards 5
If a non-current asset is ‘held for sale’, the economic benefit of that asset is obtained through the asset’s sale rather than through its continuous use in the business (future economic benefit). Such assets cease to be depreciated as they are no longer being consumed by the business. Moreover, an asset held for sale is valued at the lower of either:
- the asset’s carrying cost; or
- the asset’s fair value less the cost of selling this asset.
Non-current assets ‘held for sale’ should be presented separately on the face of the Balance sheet as a current asset.
For a non-current asset (Fixed Asset) to be classified as ‘held for sale’, all of the following 4 conditions must be satisfied:
- The asset must be available for immediate sale in its present condition and location; and
- The asset’s sale is expected to be completed within 12 months of classification as ‘held for sale’; and
- There must be no expectation that the plan for selling the asset will be withdrawn or changed significantly; and
- The successful sale of the asset must be highly probable, signified by both:
- – The management’s commitment to the asset-selling plan; and
- – Existence of active marketing to support the sale of the asset.
The managements decision is also required for that sale proceeds and then the Fair value could be ascertained.
Main features of the IFRS standards 5
IFRS 5 deals with the accounting for non-current assets held-for-sale, and the presentation and disclosure of discontinued operations. It introduces a classification for non-current assets which is called ‘held-for-sale’.
An entity classifies a non-current asset as held-for-sale if its carrying amount will be recovered mainly through selling the asset rather than through usage. The classification also applies to disposal groups, which are a group of assets and possibly some liabilities which an entity intends to dispose of in a single transaction.
The conditions for a non-current asset or disposal group to be classified as held-for-sale are as follows:
- the assets must be available for immediate sale in their present condition and its sale must be highly probable
- the asset must be currently marketed actively at a price that is reasonable in relation to its current fair value
- the sale should be completed, or expected to be so, within a year from the date of the classification, and
- the actions required to complete the planned sale will have been made, and it is unlikely that the plan will be significantly changed or withdrawn.
For the sale to be highly probable, management must be committed to selling the asset and must be actively looking for a buyer. It is possible that the sale may not be completed within one year, but the delay effectively must be caused by events beyond the entity’s control and the entity must still be committed to selling the asset.
Main features of the IFRS standards 5
IFRS 5 deals with the accounting for non-current assets held-for-sale, and the presentation and disclosure of discontinued operations. It introduces a classification for non-current assets which is called ‘held-for-sale’.
An entity classifies a non-current asset as held-for-sale if its carrying amount will be recovered mainly through selling the asset rather than through usage. The classification also applies to disposal groups, which are a group of assets and possibly some liabilities which an entity intends to dispose of in a single transaction.
The conditions for a non-current asset or disposal group to be classified as held-for-sale are as follows:
- the assets must be available for immediate sale in their present condition and its sale must be highly probable
- the asset must be currently marketed actively at a price that is reasonable in relation to its current fair value
- the sale should be completed, or expected to be so, within a year from the date of the classification, and
- the actions required to complete the planned sale will have been made, and it is unlikely that the plan will be significantly changed or withdrawn.
For the sale to be highly probable, management must be committed to selling the asset and must be actively looking for a buyer. It is possible that the sale may not be completed within one year, but the delay effectively must be caused by events beyond the entity’s control and the entity must still be committed to selling the asset.
Main features of the IFRS standards 5: Example
An entity has agreed in a directors’ meeting to sell a building, and has tentatively started looking for a buyer for the building. The price of the building has been fixed at $4m and a surveyor has valued the building based on market prices at $3.6m. The entity will continue to use the building until another building has been found with equivalent facilities, and in a suitable location for the office staff, who will not be relocated until the new building has been found.
Additionally, the entity is planning to sell part of its business and has actively marketed the business at a fair price but, before the business can be sold, government approval is required and any sale requires government approval. This means that the sale time is difficult to determine and it may take longer than one year to sell the disposal group.
Main features of the IFRS standards 5: Answer
The building will not be classified as held-for-sale as it is not available for immediate sale because, until new premises have been found, the office staff will remain in the existing building. Also, the directors have only tentatively started looking for a buyer which may indicate that the entity is not committed to the sale. Additionally, the price being asked for the building is above the market price, and is not reasonable compared to that price. It is unlikely that the entity will sell the building for that price.
The disposal group, however, would be classified as held-for-sale because the delay is caused by events or circumstances beyond the entity’s control, and there is evidence that the entity is committed to selling the disposal group.
Main features of the IFRS standards 5
Measurement of non-current assets which are held-for-sale
Just before the initial classification of a non-current asset (disposal group) as held-for-sale, it should be measured in accordance with IFRS. When non-current assets or disposal groups are classified as held-for-sale, they are measured at the lower of the carrying amount and fair value less cost to sell. If the sale is expected to occur in over a year’s time, the entity should measure the cost to sell at its present value, and any increase due to the unwinding of the discount is charged to profit or loss.
Any subsequent increases in fair value less cost to sell of the asset can be recognised in profit and loss to the extent that it is not in excess of the cumulative impairment loss that has been recognised.
Non-current assets or disposal groups classified as held-for-sale should not be depreciated.
Main features of the IFRS standards 5: Other key points
Entities often acquire non-current assets exclusively with a view to disposal. Such a non-current asset will be classified as held-for-sale at the date of the acquisition only if it is anticipated that it will be sold within the one-year period, and it is highly probable that the held-for-sale criteria will be met within a short period (normally three months) of the acquisition date.
If the criteria for classifying a non-current asset as held-for-sale occur after the balance sheet date, then the non-current asset should not be shown as held-for-sale but disclosure of the fact should be made.
If an entity is winding up operations or ‘abandoning’ assets, then these assets do not meet the definition of held-for-sale. However, a disposal group that is to be abandoned may meet the definition of a discontinued activity.
Abandonment means that the non-current asset has been used to the end of its economic life or the disposal group will be closed rather than sold. If the asset is temporarily not being used, it is not deemed to be abandoned.
Main features of the IFRS standards 5: Example
An entity has stopped using certain plants because of a downturn in orders. It is maintaining the plant as the entity hopes that orders will pick up in future. Additionally, it intends to shut down one-half of its manufacturing base. The units to be closed constitute a major segment of its business and will close in the current financial year.
Main features of the IFRS standards 5: Answer
The equipment will not be treated as abandoned as it will subsequently be brought back into usage, and the manufacturing units will be treated as discontinued operations.Change of plans
If criteria for an asset to be classified as held-for-sale are no longer met, then the asset or disposal group ceases to be held-for-sale. In this case, it should be valued at the lower of the carrying amount before the asset or disposal group was classified as held-for-sale (as adjusted for any subsequent depreciation, amortisation or re-valuation), and its recoverable amount at the date of the decision not to sell. Any adjustment to the value should be shown in income from continuing operations for the period.
Disclosure – non-current assets held-for-sale
Non-current assets held-for-sale and assets of disposal groups must be disclosed separately from other assets in the balance sheet. The liabilities must also be disclosed separately in the balance sheet.
There are several other discloses required, including a description of the non-current assets of a disposal group, a description of the facts and circumstances of the sale, and the expected manner and timing of that disposal.
Discontinued operations: presentation and disclosure
A discontinued operation is a part of an entity that has either been disposed of or is classified as held-for-sale, and:
- represents a separate major line of business or geographical area of operations
- is part of a single co-ordinated plan to dispose of separate major lines of business or geographical area of operations, or
- the subsidiary was acquired exclusively with a view to resale.
The total of the post-tax profit or loss of the discontinued operation, and the post-tax gain or loss recognised on the measurement to fair value less cost to sell (or on the disposal), should be presented as a single figure on the face of the income statement.
IFRS 5 requires detailed disclosure of revenue, expenses, pre-tax profit or loss, and the related income tax expense either in the notes or on the face of the income statement. If this information is presented on the face of the income statement, then the information should be separately disclosed from that of continuing operations.
As regards the presentation in the cash flow statement, the net cash flows attributable to the operating, investing and financing activities of the discontinued operation should be separately shown on the face of the cash flow statement or disclosed in the notes. Retrospective classification as a discontinued operation where the criteria are met after the balance sheet date is prohibited by IFRS 5.
Main features of the IFRS standards 5
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