INTERMEDIATE ACCOUNTING III (AE 17)

LEARNING MATERIAL

UNIT NUMBER/ HEADING: NONCURRENT ASSET HELD FOR SALE

LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
a. Determine the recognition of noncurrent asset held for sale
b. Identify the conditions for the classifications of a noncurrent
asset held for sale
c. Determine the measurement of noncurrent asset held for sale
d. Determine the recognition of writedown to fair value and
subsequent increase in fair value of noncurrent asset held for
sale
e. Determine the recognition of noncurrent asset that ceases to
be classified as held for sale

Presentation of Content

DEFINITON AND BASIC PRINCIPLES

 Noncurrent asset is an asset that does not meet the definition of a
current asset
 A disposal group is 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
 PFRS 5, paragraph 6, provides that a noncurrent asset or disposal
group is classified as held for sale if the carrying amount will be
recovered principally through a sale transaction rather than through
continuing use
 A noncurrent asset or disposal group shall be classified as held for
sale if the following conditions are present:
 the asset or disposal group is available for immediate sale
in the present condition subject only to terms that are usual
and customary for sale of such assets or disposal group. In
other words, the current condition of the asset should be
adequate to be effectively “sold as seen”
 the sale must be highly probable
o for the sale to be highly probable, the following
conditions must be met:
 management must be committed to a plan to sell
the asset or disposal group

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  an active program to locate a buyer and complete
the plan must have been initiated
 the sale is expected to be a completed sale
within one year from the date of classification as
held for sale
 the asset or disposal group must be actively
marketed for sale at a sale price that is
reasonable in relation to the fair value
 actions required to complete the plan indicate
that it is unlikely that the plan will be significantly
changed or withdrawn

Measurement of asset held for sale

 PFRS 5, par. 15, provides that an entity shall measure a noncurrent
asset or disposal group classified as held for sale at the lower of
carrying amount (CA) or fair value less cost of disposal (FV-CoD)
 Fair value of an asset is the price that would be received to sell an
asset in an orderly transaction between seller and buyer at the
measurement date
 Cost of disposal is the incremental cost directly attributable to the
disposal of an asset or disposal group but excluding finance cost and
income tax expense
 PFRS 5, par, 25, further provides that a noncurrent asset classified as
held for sale shall not be depreciated
 If the FV-CoD is lower than CA, the writedown is treated as
impairment loss
 If the noncurrent asset is a disposal group, the impairment loss is
apportioned accross the assets
 If subsequently there is an increae in the FV-CoD, an entity shall
recognize a gain but not in excess of any impairment loss previously
recognized

Illustration
On January 1, 2017, an entity acquired an equipment at a cost of P5,000,000
to be used in the ordinary course of business. The equipment has an
estimated useful life of 10 years and a residual value of P500,000.

On January 1, 2020, the equipment was classified as held for sale. On such
date, the fair value less cost of disposal was estimated at P1,900,000. On June
30, 2020, the equipment was sold at P1,500,000.

1. To remove the equipment from property, plant and equipment and

classify it as held for sale on January 1, 2020.
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 Equipment held for sale 3,650,000
Accumulated depreciation 1,350,000
Equipment 5,000,000

Cost P5,000,000
Accumulated depreciation
(5,000,000 – 500,000 x 3/10) (P1,350,000)
Carrying amount – January 1, 2020 P3,650,000

2. To measure the equipment held for sale at the lower of carrying amount
and fair value less cost of disposal on January 1, 2020

Impairment loss 1,750,000

Equipment held for sale 1,750,000

Carrying amount P3,650,000

Fair value less cost of disposal (P1,900,000)
Impairment loss P1,750,000

3. To record the sale of the equipment on June 30, 2020

Cash 1,500,000
Loss on sale of equipment 400,000
Equipment held for sale 1,900,000

Another Illustration
On January 1 2017, an entity acquired an equipment at a cost of P4,000,000
to be used in the ordinary course of business. The equipment has an
estimated useful life of 5 years and has no residual value

On December 31, 2018, the equipment was classified as held for sale. On
such date, the fair value less cost of disposal was P3,000,000. On July 1,
2019, the equipment was sold for P2,900,000.

1. To remove the equipment from property, plant and equipment and

classify it as held for sale on December 31, 2018.

Equipment held for sale 2,400,000

Accumulated depreciation 1,600,000
Equipment 4,000,000

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 2. To measure the equipment held for sale at the lower of carrying amount
and fair value less cost of disposal on December 31, 2018:

No entry is required because the equipment held for sale is measured

at the carrying amount of P2,400,000 which is lower than fair value
less cost of disposal

Fair value less cost of disposal P3,000,000

Carrying amount ( 2,400,000)
Expected gain p 600,000

The gain is not recognized at this time because any gain should not
be anticipated at the point of calssification as held for sale

3. To record sale of the equipment on July 1, 2019.

Cash 2,900,000
Equipment held for sale 2,400,000
Gain on sale of equipment 500,000

Revalued asset classified as held for sale

 PFRS 5, par. 18, provides that when an entity adopts the revaluation
model for the measurement of assets, any asset classified as held for
sale should be revalued to fair value immediately prior to the
classification
 The additional revaluation surplus is equal to the fair value at the
classification date less the carrying amount at that date
 Any cost of disposal at classification date should be recognized as
impairment loss for the period and deducted from the asset held for
sale
 At subsequent year-end, the revalued asset classified as held for sale
shall be measured at the lower of carrying amount an fair value less
cost of disposal

Illustration:
On January 1, 2017, an entity acquired land at a cost of P2,500,000. The
land is measured at fair value in accordance with the revaluation model.

On December 31, 2017, the fair value of the land was P3,000,000. On June
30, 2018, the land was classified as held for sale. On such date, the fair value
was estimated at P3,500,000 and the cost of disposal at P100,000. On
December 31, 2018, the land was sold for P3,350,000.

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Journal Entries
1. To record the acquisition of land on January 1, 2017:

Land P2,500,000
Cash P2,500,000

2. To measure the land at fair value on December 31, 2017:

Land P 500,000
Revaluation Surplus P 500,000

Fair value – December 31, 2017 P3,000,000

Cost P2,500,000
Revaluation surplus P 500,000

3. To measure the land at fair value on the date of classification as held

for sale on June 30, 2018:

Land P500,000
Revaluation Surplus P500,000

Fair value – June 30, 2018 P3,500,000

Carrying amount – December 31, 2017 P3,000,000
Additional revaluation surplus P 500,000

4. To remove the land from property, plant and equipment and classify it
as held for sale on June 30, 2018

Land held for sale P3,500,000

Land P3,500,000

5. To recognize the cost of disposal as impairment loss on June 30, 2018:

Impairment loss P100,000

Land held for sale P100,000

6. To record the sale of land on December 31, 2018:

Cash P3,350,000
Loss on sale of land P 50,000
Land held for sale P3,400,000

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 7. To transfer the revaluation surplus to retained earnings:

Revaluation surplus P1,000,000

Retained earnings P1,000,000

 An entity shall not classify as held for sale a noncurrent asset or

disposal group that is to be abandoned. This is because the carrying
amount will be recovered principally through continuing use or the
noncurrent asset is to be used until the end of its economic life
 An entity shall not account for a noncurrent asset that has been
temporarily taken out of use as if it had been abandoned.
 An entity shall measure the noncurrent asset that ceases to be
classified as held for sale at the lower of;
o CA before the asset was classified as held for sale adjusted for
any depreciation or amortization that would have been
recognized if the asset had not been classified as held for sale
o Recoverable amount at the date of the subsequent decision
not to sell

Illustration:
An entity purchased equipment for P5,000,000 on January 1, 2017 with a
useful life of 10 years and no residual value. On December 31, 2018, the entity
classified the asset as held for sale. The fair value of the equipment on
December 31, 2018 is P3,300,000 and the cost of disposal is P100,000.

On December 31, 2019, the fair value of the equipment is P3,800,000 and the
cost of disposal is P200,000.

On the same date, the entity believed that the criteria for classification as held
for sale can no longer be met. Accordingly, the entity decided not to sell the
asset but to continue to use it.

1. To record the purchase of equipment on January 1, 2017

Equipment P5,000,000
Cash P5,000,000

2. To record depreciation for 2017

Depreciation (5M/10 years) P500,000

Accumulated Depreciation P500,000

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3. To record depreciation for 2018

Depreciation P500,000
Accumulated Depreciation P500,00

4. To remove the asset from property, plant and equipment and classify it
as held for sale on December 31, 2018

Equipment held for sale P4,000,000

Accumulated depreciation P1,000,000
Equipment P5,000,000

5. To measure the equipment held for at the lower of fair value less cost of
disposal and carrying amount on December 31, 2018

Impairment loss P800,000

Equipment held for sale P800,000

Carrying amount P4,000,000

FV-CoD (P3,300,000 – P100,000) (P3,200,000)
Impairment loss P 800,000

6. To measure the equipment that ceases as held for sale at the lower of
carrying amount adjusted for depreciation that would have been
recognized had the equipment not been classified ad held for sale and
the recoverable amount on December 31, 2019

Equipment held for sale P300,000

Gain on reclassification P300,000

Carrying amount – December 31, 2018 P4,000,000

Depreciation that would have been recognized – 2019 (P 500,000)
Carrying amount – December 31, 2019 P3,500,000

Recoverable amount (P3,800,000 – P200,000) P3,600,000

Measurement of equipment – lower P3,500,000

CA per book – December 31,2018 P3,200,000
Gain on reclassification P 300,000

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 7. To reclassify the asset as PPE on December 31, 2019

Equipment P3,500,000
Equipment held for sale P3,500,000

8. To record depreciation for 2020

Depreciation P500,000
Accumulated depreciation P500,000

Presentation of asset classified as held for sale

 Assets classified as noncurrent in accordance with PAS 1 shall not be
reclassified as current assets until they meet the criteria to be classified
as held for sale
 Simply, a noncurrent asset that is already classified as held for sale
shall be presented separately as current asset
 if the noncurrent asset is a disposal group classified as held for sale,
the assets and liabilities of the group shall be presented separately and
cannot be offset as a single amount

Change in method of disposal

 the IASB amended IFRS 5 to clarify the accounting treatment when an
entity reclassifies an asset or disposal group from “held for sale” to “held
for distribution to owners” or vice versa without any time lag.

a. The change in classification is considered a continuation of the

original plan of disposal
b. The entity shall continue to apply the “held for sale” or “held for
distribution” accounting.

In other words, the asset shall be measured at the lower between

carrying amount and FV-CoD or fair value less cost to distribute

c. At the time of reclassification, the entity shall recognize any

impairment loss or subsequent increase in fair value less cost of
disposal or distribution
d. The change in classification does not, in itself, extend the period in
which a sale has to be completed