IFRS 5 Non-current asset held for sale and discontinued

operations

1. EXPLAIN THE NEED FOR AN ACCOUNTING STANDARD ON DISCONTINUED OPERATIONS

IFRS 5 Non-current assets held for sale and discontinued operations sets out requirements for
disclosure of financial information relating to discontinued operations and noncurrent assets that
will soon be sold off.

is as follows:

 Closing down some operations will affect the future financial prospects of the entity.
 It is therefore appropriate that users of the financial statements should be provided with
relevant information about the discontinuation.

This will help them to predict the future performance of the entity. This information can be
produced by providing information about discontinued operations separately from information
about continuing operations.

DISCONTINUED OPERATIONS

2. DEFINITION OF DISCONTINUED OPERATIONS

IFRS 5 defines a discontinued operation as a component of an entity that either:

has been disposed of in the period, or

is classified as ‘held for sale’ (but has not yet been disposed of).

A of an entity is defined as

3. FEATURES OF A COMPONENT OF AN ENTITY :

The component of the entity must:

 represent a separate major line of business or a significant geographical area of operations,

or
 be a part of a single and co-ordinated plan to dispose of a separate major line of business or
a significant geographical area of operations, or
 be a subsidiary company acquired exclusively with a view to re-sale.

If an entity disposes of an individual non-current asset, or plans to dispose of an individual asset in

the immediate future, this is not classified as a discontinued operation unless the asset meets the
definition of a ‘component of an entity’.

The asset disposal should simply be accounted for in the ‘normal’ way, with the gain or loss on
disposal included in the operating profit for the year.

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 IFRS 5 Non-current asset held for sale and discontinued
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NON-CURRENT ASSETS HELD FOR SALE

3. A BRIEF NOTE ON NON-CURRENT ASSETS HELD FOR SALE

Non-current assets ‘held for sale’ can be either:

 specific non-current assets, or

 a ‘disposal group’.

A disposal group is a group of cash-generating assets (and perhaps some liabilities) that will be
disposed of in a single transaction.

4. WHEN SHOULD A NON-CURRENT ASSET BE CLASSIFIED AS HELD FOR SALE ?

Where an entity decides that a non-current asset or a disposal group , is no longer to be held for
continuing use, rather it is to be sold, the non-current asset or the disposal group must be
classified as held for sale.

A non-current asset (or a disposal group) should be classified as held for sale if its carrying
amount will be recovered mainly through a sale transaction rather than through continuing use.

IFRS 5 requires the following conditions to be met before an asset or disposal group can be
classified as ‘held for sale’:

i. The item is available for immediate sale in its present condition.

ii. The sale is highly probable.

IFRS 5 sets out following criteria for the sale to be highly probable:

i. Management is committed to a plan to sell the item.

ii. An active programme to locate a buyer has been initiated.
iii. The item is being actively marketed at a reasonable price in relation to its current fair
value.
iv. The sale is expected to be completed within one year from the date of classification.
v. It is unlikely that the plan will change significantly or be withdrawn.

Illustration 1 :

Hyssop is preparing its financial statements for the year ended 31 December 2017. On 1 December
2017, the entity became committed to a plan to sell a surplus office property and has already found
a potential buyer. On 15 December 2017 a survey was carried out and it was discovered that the
building had dry rot and substantial remedial work would be necessary. The buyer is prepared to
wait for the work to be carried out, but the property will not be sold until the problem has been
rectified. This is not expected to occur until summer 2018.

Required: Can the property be classified as ‘held for sale’?

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Solution :

IFRS 5 states that in order to be classified as ‘held for sale’ the property should be available for
immediate sale in its present condition. The property will not be sold until the work has been carried
out, demonstrating that the facility is not available for immediate sale. Therefore the property
cannot be classified as ‘held for sale’.

Illustration 2 :

A subsidiary entity, B, is for sale at a price of ₹3 million. There has been some interest from
prospective buyers but no sale as of yet. One buyer has made an offer of ₹2 million but the Directors
of Hyssop rejected the offer. The Directors have just received advice from their accountants that the
fair value of the business is ₹2.5 million. They have decided not to reduce the sale price of B at the
moment.

Required: Can the subsidiary be classified as ‘held for sale’?

Solution :

The subsidiary B does not meet the criteria for classification as ‘held for sale’. Although actions to
locate a buyer are in place, the subsidiary is not for sale at a price that is reasonable compared with
its fair value – the fair value of the subsidiary is ₹2.5 million, but it is advertised for sale at ₹3 million.
It cannot be classified as 'held for sale’ until the sales price is reduced.

5. MEASUREMENT OF ASSETS AND DISPOSAL GROUPS HELD FOR SALE :

Assets held for sale and disposal groups should be valued at the :

FAIR VALUE MINUS COSTS TO

THEIR CARRYING AMOUNT
and SELL

SITUTATION EFFECT OF CHANGE

CARRYING AMOUNT < FAIR VALUE less COSTS NO CHANGE
TO SELL
FAIR VALUE less COSTS TO SELL < CARRYING IMPAIRMENT LOSS TO BE CHARGED TO PROFIT
AMOUNT OR LOSS

While a non-current asset is classified as “Non-current assets held for sale”

1. It is carried within current assets in the statement of financial position; and

2. It is not depreciated from the date of reclassification.

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 IFRS 5 Non-current asset held for sale and discontinued
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Illustration 3 :

On 1 January 2011, AB acquires a building for ₹200,000 with an expected life of 50 years. On 31
December 2014 AB puts the building up for immediate sale. Costs to sell the building are estimated
at ₹10,000.

Required : Outline the accounting treatment of the above if the building had a fair value at 31
December 2014 of: (a) ₹220,000 (b) ₹110,000.

Solution :

Until 31 December 2014 the building is a non-current asset and its accounting treatment is
prescribed by IAS 16. The annual depreciation charge was ₹4,000 (₹200,000/50). As such, the
carrying amount at 31 December 2014, prior to reclassification, was ₹184,000 (₹200,000 – (4 ×
₹4,000)

(a) On 31 December 2014 the building is reclassified as a noncurrent asset held for sale. It is
measured at the lower of carrying amount (₹184,000) and fair value less costs to sell
(₹220,000 – ₹10,000 = ₹210,000). This means that the building will continue to be measured
at ₹184,000.
(b) On 31 December 2014 the building is reclassified as a noncurrent asset held for sale. It is
measured at the lower of carrying amount (₹184,000) and fair value less costs to sell
(₹110,000 – ₹10,000 = ₹100,000). The building will therefore be measured at ₹100,000 as at
31 December 2014. An impairment loss of ₹84,000 (₹184,000 – ₹100,000) will be charged to
the statement of profit or loss

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 IFRS 5 Non-current asset held for sale and discontinued
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If a non-current asset is measured using a revaluation model and it meets the criteria to be
classified as being held for sale,

(i) It should be re-valued to fair value immediately before it is classified as held for sale.
(ii) It is then re-valued again at the lower of the carrying amount and the fair value less
costs to sell. The difference is the selling costs and these should be charged against
profits in the period.

(The revaluation model as per IAS 16 are (i) Fair Value (ii) Value is use (iii) replacement cost)

Illustration 4 :

Joy Plc is planning to dispose of a collection of assets. These assets are a disposal group and the
carrying amount of these assets immediately before classification was ₹40m. Joy uses the
revaluation model in IAS 16. Upon being classified as a disposal group the assets were revalued to
₹36m under IFRS. Joy feels that the selling costs would amount to ₹2m.

Required : How would the revaluation of the assets on classification as a disposal group be treated
in the financial statements?

Solution :

The entity recognises a loss of ₹4m under IAS 16 immediately before classification as held-for-sale
and then recognises an impairment loss of ₹2m

DISCLOSURE :

IFRS 5 requires discontinued operations to be presented as follows:

1. In the statement of profit and loss and other comprehensive income: a single amount comprising
the total of:

 The post-tax profit or loss of the discontinued operation,

 The post-tax gain or loss recognised on the measurement to fair value less costs to sell, and
 The post-tax gain or loss recognised on the disposal of assets or the disposal group making
up the discontinued operation.

The analysis of the single amount can be presented in the notes or on the face of the statement of
profit or loss and other comprehensive income.

2. In the statement of cash flows: the net cash flow attributable to the operating, investing and
financing activities of discontinued operations

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 IFRS 5 Non-current asset held for sale and discontinued
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In the statement of financial position: non-current assets of a disposal group must be presented
separately from other assets. The same applies for liabilities of a disposal group classified as held for
sale.

QUESTIONS :

1. What are the reason for requiring disclosure of information about discontinued operations ?
2. Define Discontinued operations
3. Define component of the entity as per IFRS 5
4. Define Disposal group
5. What are the features of the component of an entity ?
6. What are the conditions to be met before an asset or disposal group can be classified as
‘held for sale’ as per IFRS 5?
7. What are the criteria for the sale to be highly probable, as per IFRS 5?
8. When should a non-current asset be classified as held for sale?

MULTIPLE CHOICE QUESTIONS :

9. An entity has a non-current asset that has been classified as held-for-sale but the asset no
longer meets the criteria to be held for sale. The entity should, therefore...

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a. measure the non-current asset at the lower of its carrying amount before its asset was
classified as held-for-sale (as adjusted for subsequent depreciation, amortisation, or re-
valuations) and its recoverable amount at the date of the decision not to sell
b. re-measure in accordance with applicable IFRS
c. re-measure the non-current asset at fair value
d. leave the non-current asset in the financial statements at its current carrying value

10. Joy Plc is planning to dispose of a collection of assets. These assets are a disposal group and
the carrying amount of these assets immediately before classification was ₹40m. Joy uses
the revaluation model in IAS 16. Upon being classified as a disposal group the assets were
revalued to ₹36m under IFRS. Joy feels that the selling costs would amount to ₹2m. How
would the revaluation of the assets on classification as a disposal group be treated in the
financial statements?
a. The entity recognises a loss of ₹4m under IAS 16 immediately before classification as
held-for-sale and then recognises an impairment loss of ₹2m
b. The entity recognises an impairment loss of ₹6m
c. The entity recognises an impairment loss of ₹4m
d. The entity recognises a loss of ₹2m

11. A non-current asset which has been classified as held-for-sale should...

a. be depreciated over its remaining useful life
b. not be depreciated
c. be valued at depreciated historical cost
d. be tested monthly for impairment

12. One of the following criteria does not have to be met in order for an operation to be
classified as discontinued –
a. The operation is part of a single plan to dispose of a separate major line of business or
geographical area
b. The operation is a subsidiary acquired exclusively with a view to resale
c. The operation should represent a separate line of business or geographical area
d. The operation must be sold within three months of the year end

13. In order for a non-current asset to be classified as held-for-sale the sale must be highly
probable. Highly probable means...
a. the sale contract has been signed
b. that the future sale will occur
c. that the future sale is might occur
d. management must be committed to selling the asset and must be actively looking for a
buyer

14. An entity designates a group of assets as a disposal group. The carrying amount of these
assets before classification as a disposal group was ₹35m. Upon being classified as held-for-
sale the assets were revalued to ₹33m on the basis of their fair value in accordance with IAS
16. The entity feels that it would cost ₹3m to sell the disposal group. What would be the
carrying amount of the disposal group in the financial statements?

a. ₹35m
b. ₹33m

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 IFRS 5 Non-current asset held for sale and discontinued
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c. ₹32m
d. ₹30m

15. How should the income from discontinued operations be shown in the income statement?

a. The amounts from discontinued operations should be included with income form continuing
operations and not shown separately
b. The entity should disclose a single amount on the face of the income statement with analysis
in the notes or a section of the income statement separate from continuing operations
c. Discontinued operations should be shown as a movement in the statement of changes in
equity only
d. Discontinued operations should be shown as a line item after gross profit with the taxation
being shown as part of income tax expense

ONE WORD QUESTIONS :

16. A ____________of an entity is defined as “operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity”.
17.

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