Measurement of non-current assets IFRS standards 5

Measurement of non-current assets IFRS standards 5  : 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.

Measurement of non-current assets 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.

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.

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.

Measurement of non-current assets IFRS standards 5:  Non-current assets held for sale

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.

Measurement of non-current assets 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.