IFRS 5 (International Financial Reporting Standard 5)

Non-Current Assets Held for Sale and Discontinued Operations

Objective

To Improve information in financial statements about assets and disposal groups that are to be disposed of and discontinuing operations. It seeks to do this by specifying:

·    The measurement, presentation and disclosure of non-current assets and disposal groups to be disposed of; and

·         The presentation of discontinued operations.

Scope

IFRS-5 is applicable to all:

·         Non-current assets

·         Disposal groups

However, IFRS-5 does not apply to the following non-current assets:

·         Goodwill

·         Deferred tax assets

·         Financial assets within the scope of ias-39, financial instruments: recognition and measurement

·         Assets arising from employee benefits

·         Financial assets arising under finance leases

Key Terms

·         Disposal Group

A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. A disposal group could be a subsidiary, a cash generating unit or a single operation within an entity.

·         Fair Value

The amount for which as asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction.

·         Recoverable amount

The higher of an asset’s fair value less costs to sell and its value in use.

·         Value in use

The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

·         Net selling price

The amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable willing parties less the cost of disposal.

·         Cost of disposal

Incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expenses.

·         Probable

The term probable has been defined as ‘more likely than not’.

·         Highly probable

Highly probable has been regarded as ‘implying a significantly higher probability’ than ‘more likely than not’.

Classification of non-current assets as held for sale

An asset is to be classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. In addition, to classify an asset as held for sale the following conditions must be met:

·         Management is committed to a plan to sell

·         The asset is available for immediate sale

·         An active program to locate a buyer is initiated

·         The sale is highly probable, within 12 months of classification as held for sale.

However, the 12 months’ period is extended where:

·         Delay is caused by events or circumstances that are not in the entity’s control; and

·         There is evidence that the entity is committed to its plan to sell the asset (or the disposal group).

           Classification of assets as ‘held for sale’ AFTER the reporting date:

If the criteria for asset to be classified as ‘held for sale’ is met after the reporting date, the asset should not be classified as ‘held for sale’ in those financial statements issued.

Where an asset meets the criteria of an asset held for sale after the reporting date, but before the authorization of the financial statements for issue, the asset shall be disclosed in the notes to the accounts according to the disclosure requirements.

Classification of assets as ‘held for sale’ At the date of acquisition:

Where a non-current asset is acquired with a view to its subsequent disposal, the classification of the asset as ‘ held for sale’ is only permissible if the sale is probable within 12 months of classification as held for sale.

If the asset acquired does not meet any other criteria for it to be classified as ‘held for sale’ the asset must be sold within a short period (usually three months) following the acquisition.

Depreciation

Non-current assets or disposal groups that are classified as held for sale shall not be depreciated.

Non-current assets that are to be abandoned

These include:

• Non-current assets (or disposal groups) that are to be used to the end of their economic life; and
• Non-current assets (or disposal groups) that are to be closed rather that sold.
• Assets can only be classified as ‘held for sale’ if they are intended to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition.
• Only assets whose carrying amount is to be recovered through sale can be classified as ‘held for sale’. In case of assets that are to be abandoned, the carrying amount will be recovered principally through continuing use.
• However, if the assets to be abandoned meet the recognition criteria (discussed below) they may be classified as discontinued once abandoned.
• Where assets to be abandoned meet the recognition criteria for discontinued operations, appropriate disclosures have to be made.

Measurement of Non-current Assets (or Disposal Groups) Classified as Held for Sale

• At the time of classification as held for sale

Immediately before the initial classification of the asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable IFRS.

• After classification as held for sale

Non-current assets or disposal groups that are classified as held for sale are measured at the lower of:

1. Carrying value; and
2.  Fair value less costs to sell.

•  Classification at the time of acquisition

If an asset (or disposal group) is classified as ‘held for sale’ immediately on acquisition, it will be measured on initial recognition at the lower of:

1. Carrying amount had it not been so classified (for example cost); and
2.  Fair value less costs to sell.

An asset acquired as part of a business combination shall be measured at fair value less costs to sell.