IFRS 5 – Noncurrent Asset Held for Sale & Discontinued Operations
This IFRS deals with two things, noncurrent assets held for sale and discontinued operations
The basic concept here is to understand that the non-current asset held for sale, a part of Strategic Business Reporting (SBR) is related to the presentation of a statement of financial position whereas discontinued operation is the presentation of the income statement.
The first part of IFRS 5 – Noncurrent asset held for sale
Let’s understand the first part of this ifrs
Non-current is bought to use it, and the company used it for 3 years for its operation but before the year 4, our intention toward this asset changed to selling it. now this asset would not be reported as non current asset rather it will be classified as a current asset. so this IAS allows us to record the non-current asset as the current asset
What does it mean by noncurrent asset help for sale?
It is a type of non-current asset whose carrying value is principally recovered through a sale transaction and not from continuing use. This means the company will get more benefits by selling it rather than using it for its operations
Here comes the threat.
Does this mean that we can transfer the non-current asset to the current asset anytime we want to improve our liquidity ratios? This will not show shareholders the true and fair financial position of companies. To deal with such threats the standard board launches criteria before shifting the asset to the current asset. If such criteria are fulfilled only then the companies are allowed to shift the nature of the asset. this criteria includes four condition
First condition – The asset must be in a condition in which we can sell it immediately
Explanation: This means that the asset, the entity is intended to sell is our surplus asset and this asset is not currently being used in the entity’s operations. Then this criteria meets the conditions and the standard allowed to shift the NCA to the current asset What if the asset is being used currently in the operations? Then there is no way this standard is applied to such NCA. then you must present a substitute for it that will be used in place of the asset you now intend to sell.
Another condition is that if the asset is considered to sell immediately then there should be no repair cost attached to it.
The asset must not be with the lessee on the lease. If the asset is being used to generate rental income then the company is not entitled to sell it immediately because the possession of the asset is not in the hands of the company
The second condition- the sale is highly probable
Explanation: This condition depends on the management’s commitment to sell that asset. the meeting has been done by the board of directors and the chances of selling the asset are more than 70 percent. The management has publicly disclosed the fact that this asset is available to purchase and is locating buyers for the asset. now the second condition is also based on one more fact which is the asset must be marketed at its fair value, Here standard is saying that if management wants to sell its non-current asset at a price higher than its fair value in the market then such asset cannot be considered as held for sale. but if it is a marketing strategy to portray the asset at a higher value initially so that after negotiating you can get the buyer to pay at your preferred value.in such a condition, you can classify the asset as held for sale.
Third condition- the sale is expected to be done within 12 months of its classification date
Explanation: Here the most common mistake made by the student is that they think this 12-month period start after the year-end whereas it starts at the date of classification which could be mid-year.
The question here is, what if the company classifies the asset as held for sale and it didn’t get sold within 12 months of its classification date? this question can be answered by understanding two things
Uncontrollable factors : It didn’t get sold because of uncontrollable factors which could be market competition going down etc. and if the asset still meets the held-for-sale condition then it can be shifted to the current asset.
Controllable factors: If the asset didn’t get sold because of controllable factors means that the entity was not serious about selling the asset in the first place and ignored the buyer who came to purchase the asset, then under such conditions, the international accounting standard board strictly said to shift the asset back to its original nature which is non-current asset. From now on the company is not entitled to consider this asset as held for sale anymore. revert to a non-current asset
The fourth condition- it is highly unlikely that the management will change its plan to sell this asset
If the entity is not sure whether to sell the asset then under such conditions you cannot classify the asset to be held for sale.
Treatment for depreciation
Once the asset is classified to be held for sale means that the asset is now shifted from non-current assets or fixed assets to current assets. now we all know that on current assets no depreciation is charged, therefore no depreciation.
Example inspired by the past paper on financial reporting
If the asset is classified to be held for sale in the mid-year then for the first 6 months asset is considered to be a non-current asset which means that depreciation will also be charged for the first 6 months. now in the mid-year at the time of classification calculate the net book value first, in this case, NBV on 1 July after calculating NBV derecognize the non-current asset and recognize the current asset under the head of non-current asset held for sale(NCA HSF). The entry on 1 July would be (NCA HSF) debit and property plant and equipment credit. The day you make this entry means that from now on IFRS 5 is being applied.
Impairment testing is IFRS 5
IFRS 5 states that an asset is recorded at a lower of carrying value( the value at which the asset is being carried ) or fairvalue less cost to sell ( this might be given in the question and it means that what benefit we can drive by selling the asset today )
If the carrying value is higher than the fair value less cost to sell then it means the company is showing the asset at higher value whereas the benefit derived by selling it is less. then in this case the difference between them will be considered as impairment. The double entry for this impairment would be profit and loss account debit and non-current asset (held for ) credit. by making such an entry the non-current asset would be recorded at its true fair value and will be equal to its fair value less cost to sell which we used to account for impairment testing. this is why the standard said to record the non-current asset (held for sale) at a lower of NBV or fair value less cost to sell.
Summarize steps of the above explanation
- Calculate depreciation before classification of held-for-sale
- Calculate NBV at the date of classification
- Apply the IFRS rule. the lower of NBV and fair value less cost to sell
- Account for impairment if NBV is higher than fairvalue
Question in mind: why didn’t we apply value in the used
By value in use it means that if we used the asset consistently then what benefit we can derive from it in the future? But here the intention has changed we are no longer using the asset rather we are selling it. so no need to calculate the value in use.
What will be accounted for in the profit and loss statement?
- Depreciation expense for the first 6 months when the asset was considered to be NCA
- Impairment will be accounted for in this statement as a loss with the amount which is calculated by the difference between net book value and fair value less cost to sell
What will be accounted for in the statement of financial position?
Note: this IFRS is tested in the final account detailed question. There is a question named “ DUNE” in the Kaplan exam kit of financial reporting f7 which is the same as the example explained above. you should consider solving it after reading this article. Remember that before solving any question your eyes should look for the accounting period and draw the sketch of the year starting date and year ended date. when no depreciation method is given remember to apply the straight-line method.
Mustafa Mirchawala excels in such topics and holds great expertise educating and empowering ACCA students with such significant topics.
The second part of this IFRS-5 (discontinuing operation)
For example, we are standing at the year in which we have discontinued one of our operations and only have classified as held of sale this year. So the operating profit for this year let’s say is 10 million whereas in the next year the profit will decrease to 2 million because in the next year, the operation will be discontinued. so disclosing such information to shareholders is mandatory otherwise the shareholders and investors will keep on expecting 10 million in profit even for the next year
Therefore P & L first shows the profit from continued operation and subtracts the profit of discontinued operation so that shareholders get a true and fair view of the financial position of the entity
Important theoretical concepts of discontinued operations
- As mentioned in the initial part of this blog, the Discontinued operation is the presentation of the income statement whereas HFS(held for sale)is the presentation of SOFP.
- For discontinued operation the operation must meet the definition of “Component of entity” which means its revenues, cost & cash flows must be separately identifiable. Because in the income statement, we have to show the profits calculation of continued operations and discontinued operations separately
- Discontinued operation may be “product “wise or “geographical” wise. some organization’s structures are based on division forms. For example, PWC has multiple divisions as internal auditors, tax services, advisory services, etc. so if PWC decides to sell one of its divisions then it will also do accounting for discontinued operations under the guidance of IFRS 5.
- A subsidiary acquired for the purpose of resale is also classified as a discontinued operation. Even in the case of the parent company, if one of the subsidiary companies is held for sale or is bought with the intention of selling it then this subsidiary company will not be shown as normal adding together rather it will be classified as discontinued operations.
- If an operation is classified as discontinued in the current year then it must be classified as discontinued in last year’s comparatives so that shareholders can check the performance. But if an asset is classified as HFS in the current year then no need to classify it as HFS in comparatives.
With this year’s financial statement last year’s data is also presented to shareholders for comparison reasons. if you are showing this year’s discontinued operation separately then show that same operation separately in the last year of financial statements.
Through this comparison, you can get to know the profit in comparison with the last year in this way you can get to know about the performance of that particular operation. This requirement is not for HFS. you dont need to shift last year’s non-current asset to the current asset in order for a like-for-like comparison. this is only for discontinued operations.
- In the statement of cash flow, separate cash flows of discontinued operations are reported for operating, investing & financing activities either on the face of cash flow or in the notes to the financial Statement. Just like in the income statement, we show the profits of continued and discontinued operations separately same way the cashflow statement will be separately shown. so that the shareholders do not expect high cash flows.
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’.-ACCA global
Frequently asked questions (FAQ’s)
Q1. What is the key focus of IFRS 5 – Non-Current Asset Held for Sale?
IFRS 5 primarily deals with non-current assets held for sale and discontinued operations, distinguishing between presentation in the statement of financial position and the income statement.
Q2. How does IFRS 5 handle non-current assets that were initially intended for use but later designated for sale?
IFRS 5 allows such assets to be reclassified as current assets when the intention to sell arises.
Q3. What is the main criterion for classifying an asset as “held for sale”?
An asset is classified as “held for sale” when its carrying value is primarily expected to be recovered through a sale transaction rather than continued use
Q4. How does IFRS 5 address the threat of misclassification of assets as “held for sale” for the purpose of improving liquidity ratios?
The standard introduces criteria that must be met before reclassifying assets to current assets, including immediate sale feasibility and the absence of repair costs.
Q5. When does the 12-month period for selling an asset classified as “held for sale” begin?
The 12-month period starts at the date of classification, not the year-end.
Q6. What happens if an asset classified as “held for sale” is not sold within 12 months due to uncontrollable factors?
If the criteria for “held for sale” are still met, the asset can remain classified as such. If it’s due to controllable factors, it must revert to a non-current asset.
Q7. How does IFRS 5 handle depreciation for assets classified as “held for sale”?
No depreciation is charged on assets classified as “held for sale.”
Q8. What is the primary focus of IFRS 5 regarding impairment testing?
IFRS 5 requires assets to be recorded at the lower of their carrying value or fair value less cost to sell, with any difference considered as impairment.
Q9. How does IFRS 5 account for depreciation and impairment in the financial statements?
Depreciation is accounted for in the profit and loss statement for the first 6 months before classification. Impairment is recognized as a loss in the profit and loss statement.
Q10. What information does the profit and loss statement disclose regarding discontinued operations?
The profit and loss statement first shows the profit from continued operations and then subtracts the profit of discontinued operations to provide shareholders with an accurate view of the entity’s financial position.
Q11. What conditions must a component of an entity meet to be considered a discontinued operation?
A discontinued operation must have separately identifiable revenues, costs, and cash flows.
Q12. How can discontinued operations be categorized, and what is the significance of this categorization?
Discontinued operations can be categorized based on product or geographical segments. Categorization ensures separate reporting of profits for comparison.
Q13. If an operation is classified as discontinued in the current year, what is the requirement for comparatives in the financial statements?
The operation must also be classified as discontinued in the comparatives of the previous year’s financial statements.
Q14. How does IFRS 5 treat subsidiaries acquired for resale?
Subsidiaries acquired for the purpose of resale are also classified as discontinued operations.
Q15. How is the cash flow of discontinued operations presented in the financial statements?
Cash flows of discontinued operations are reported separately for operating, investing, and financing activities in either the face of the cash flow statement or in the notes.
Written by Warisha Shehzadi Student of Mirchawala’s Hub Of Accountancy
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