IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations
Why is a different accounting treatment required for non-current assets held for sale?
The need for different accounting treatment for a non-current asset held for sale stems from the fact that, unlike other non-current assets, it is not held for continuing use. A non-current asset classified as held for sale is an asset whose carrying amount is expected to be recovered, with a high degree of certainty, usually within one year, through a sale transaction. Moreover, for a non-current asset to be classified as held for sale, it must be available for immediate sale in its present condition and be actively marketed on reasonable terms.
How does the accounting for non-current assets held for sale differ from other non-current assets?
Consequently, the accounting for non-current assets held for sale differs from the accounting for other non-current assets, both in measurement and in presentation, as follows:
What is the measurement basis for non-current assets classified as held for sale?
Different measurement basis
From the date a non-current asset (or a disposal group) is classified as held for sale, it is measured at the lower of its carrying amount and fair value less costs to sell. In addition, from that date, depreciation of that non-current asset ceases. The rationale for this different measurement basis is that reporting on non-current assets held for sale is, in essence, a valuation process rather than an allocation of cost as is common for non-current assets intended for continuing use. Also, the very requirement to reassess fair value less costs to sell at each reporting date eliminates the concern that, in the absence of depreciation, an impairment of the asset would not be recognised.
Can a non-current asset held for sale still be used by the reporting entity?
It is important to emphasise that a non-current asset classified as held for sale may still be in use by the reporting entity and generate economic benefits, provided that the asset is available for immediate sale. This fact ostensibly contradicts the accounting requirement to recognise depreciation expense, i.e., allocation of the cost of a non-current asset over the period of expected economic benefits from its use. However, the view is that the cash flows arising from the remaining use of the asset are incidental to recovery of the asset through sale. In this regard, this different measurement basis does not necessarily lead to different results compared with those relevant to non-current assets held for use, which set out principles on revising residual value and useful life for calculating depreciation of property, plant and equipment and impairment of assets.
How does the measurement of assets held for sale compare in practice to IAS 16 and IAS 36?
By way of illustration: assume the opening carrying amount of a non-current asset expected to be realised early in the next reporting year is $1,000 thousand. If the asset’s fair value less costs to sell is $1,200 thousand, then under IAS 36 Impairment of Assets no impairment would be recognised, and under IAS 16 Property, Plant and Equipment the asset would not be depreciated (assuming the updated residual value exceeds the carrying amount). Conversely, if fair value less costs to sell is $900 thousand, then under IAS 36 there is generally a need to recognise an impairment loss of $100 thousand (since, as the company intends to sell the asset, value in use is usually not materially different), and thereafter no depreciation would be recognised (as the residual value is updated).
How are non-current assets classified as held for sale presented in the statement of financial position?
Separate presentation in the statement of financial position
A non-current asset classified as held for sale is presented separately in the statement of financial position, without restating comparative amounts. The view is that this presentational distinction provides relevant and useful information to users of financial statements. Although the classification relies inherently on management’s intent, the Standard’s view is that providing information on non-current assets held for sale will help users assess the timing, amounts, and uncertainties of future cash flows.
How does IFRS 5 address disposal groups classified as held for sale?
In addition, two related accounting topics of great importance are the accounting for a disposal group classified as held for sale and the need to present separately continuing and discontinued operations:
(a) Accounting for a disposal group classified as held for sale
A disposal group is a group of assets to be disposed of together in a single transaction by sale or otherwise. The accounting for a disposal group classified as held for sale is essentially the same as the accounting for a non-current asset classified as held for sale (different measurement basis and separate presentation in the statement of financial position), with the necessary modifications.
What is a discontinued operation and why is it presented separately?
(b) Presentational distinction between continuing and discontinued operations
A discontinued operation generally represents a component of a reporting entity that is a separate major line of business or a separate major geographical area of operations, that either has been disposed of, or is classified as held for sale. The distinction between continuing and discontinued operations is intended to improve investors’, creditors’, and other users’ ability to assess the reporting entity’s capacity to generate profits in the future and to forecast the cash flows the entity will generate in the future from continuing operations.
How does IFRS 5 apply to assets held for distribution to owners?
Assets classified as held for distribution to the reporting entity’s owners
A reporting entity sometimes distributes a non-cash dividend to its shareholders. That is, the entity distributes its assets, such as property, a subsidiary, an associate or a disposal group, by way of a “dividend in kind” to all existing shareholders.
IFRIC 17 Distributions of Non-cash Assets to Owners prescribes the accounting for distributions of non-cash assets or distributions in which owners may choose to receive cash or non-cash assets, when made to all shareholders holding the equity instruments entitled to such dividends. IFRIC 17 generally requires the reporting entity to measure the liability for the distribution of non-cash assets at the fair value of the assets to be distributed.
When a reporting entity has an obligation to distribute its assets to its shareholders, the carrying amount of those assets will no longer be recovered through continuing use. Accordingly, the Standard also applies to non-current assets (or disposal groups) held for distribution to owners in their capacity as owners (“assets held for distribution to owners”). Thus, the Standard’s classification, presentation, and measurement requirements also apply, with necessary changes, to assets held for distribution to owners. Note that any reference herein to assets held for sale also includes assets held for distribution to owners.
How does IFRS 5 interact with IFRIC 17 and common-control transactions?
IFRIC 17 does not apply where a distribution of non-cash assets (including a consolidated subsidiary that constitutes a business) is made and the assets are controlled by the same party (or parties) before and after the distribution. However, the provisions in IFRS 5 do not exclude such distributions from their scope. Consequently, it appears that IFRS 5 should be applied to all types of distributions to owners in their capacity as owners.
Which assets are within the scope of IFRS 5 classification and measurement requirements?
The Standard’s provisions, which include both classification and presentation principles as well as measurement principles, apply to non-current assets. Note that while the classification and presentation principles apply to all non-current assets, the measurement requirements apply only to some of them. In this regard, current and non-current assets are defined in IFRS 18 Presentation of Financial Statements. Assets classified as non-current under IFRS 18 are not to be reclassified as current unless they meet the conditions for classification as held for sale under IFRS 5. Moreover, assets that would typically be classified as non-current but were acquired exclusively with a view to resale are not classified as current unless they meet the conditions for classification as held for sale as noted.
How are discontinued operations presented in the statement of profit or loss and cash flows?
Underlying the Standard is a distinction between presentation principles for the statement of comprehensive income and the statement of cash flows, which are required only for discontinued operations, as opposed to the presentation and measurement principles required for every non-current asset or disposal group classified as held for sale. Accordingly, the Standard requires a separation in the statement of profit or loss and other comprehensive income between the entity’s continuing operations and discontinued operations, including comparative amounts. Likewise, the Standard requires a separate presentation, on the face of the statement of cash flows or in the notes, of cash flows from continuing operations and cash flows from discontinued operations. In addition, since a discontinued operation may include a disposal group (or groups) and/or individual non-current assets held for sale, the other principles of the Standard on measurement basis and presentation in the statement of financial position will also apply in such cases.