IFRS

Hammad Sarwar

IFRS 5: Non-current assets held for sale and discontinued operations

Scope
The IFRS applies to all of an entity's recognised non-current assets and disposal groups (as defined below) with the following exceptions: Deferred tax assets; Assets arising from employee benefits; Financial assets within the scope of IAS 39; Investment properties accounted for under the fair value model; Biological assets measured at fair value; and Rights under insurance contracts.

Objective
The objective of IFRS 5 is to require entities to disclose information about discontinued operations and measurement criteria for assets where a decision had been taken to sell them. This enhances the ability of readers of financial statements to make projections about the future of the company (profitability, cash flow, financial position, etc.)

Classification as held for sale

Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sales transaction rather than through continuing use. To be classified as 'held for sale', the following criteria must be met: (a) The asset (or disposal group) must be available for immediate sale in its present condition, subject only to usual and customary sales terms; and (b) The sale must be highly probable.

For this to be the case: P rice at which the asset (or disposal group) is actively marketed for sale must be reasonable in relation to its current fair value; U nlikely that significant changes will be made to the plan or the plan withdrawn (indicated by actions required to complete the plan); M anagement (at the appropriate level) must be committed to a plan to sell; A ctive programme to locate a buyer and complete the plan must have been initiated; S ale expected to qualify for recognition as a completed sale within one year from the date of classification as held for sale (subject to limited specified exceptions).

IFRS

Hammad Sarwar

Disposal group definition (IFRS 5)

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.

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

Carrying amount; and Fair value less costs to sell.

Approach
Step 1 Immediately before initial classification as held for sale, the asset (or disposal group) is measured in accordance with the applicable IFRS (e.g. property, plant and equipment held under the IAS 16 revaluation model is revalued)

Any impairment loss arising on reclassification is accounted for as normal (IAS 36).

Step 2

Classify non-current asset (or disposal group) as held for sale and measure at the lower of: Carrying amount; and Fair value less costs to sell.

Step 3

Any impairment loss arising on reclassification is accounted for as normal (IAS 36).

Step 4

Non-current assets/disposal groups classified as held for sale are not depreciated/amortised.

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Hammad Sarwar
Step 5 Disclosed: As single amounts (of assets and liabilities) On the face of the balance sheet Separately from other assets and liabilities, and Normally as current assets and liabilities (not offset).

Discontinued operation definition (IFRS 5)

A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale and: (a) Represents a separate major line of business or geographical area of operations, or (b) Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or (c) Is a subsidiary acquired exclusively with a view to resale.

IFRS 5 requires specific disclosures for components meeting the definition during the accounting period.

Disclosure
The following disclosures apply: DISCONTINUED OPERATIONS

On the face of the income statement

Single amount comprising the total of: (i) (ii) the post-tax profit or loss of discontinued operations, and the post-tax gain or loss recognised on the remeasurement to fair value less costs to sell or on the disposal of assets/disposal groups comprising the discontinued operation.

On the face of the income statement or in the notes Revenue Expenses Profit before tax Income tax expense Post-tax gain or loss on disposal of assets/disposal groups or on remeasurement to fair value less costs to sell.

IFRS

Hammad Sarwar
EXAMPLE 1: On 1 July 20X2, an item of property, plant and equipment with a net book value of $200,000 at that date is classified as held for sale and was expected to be sold in March 20X3. Its fair value less costs to sell and market value on that date are $205,000 and $207,000 respectively. The asset had not been sold by the year end, 31 December 20X2. The asset's fair value less costs to sell at 31 December was $195,000. Required Explain the accounting treatment of the asset at initial classification as held for sale and at the year end 31 December 20X2 assuming: (a) it was held under the cost model of IAS 16 (b) it was held under the revaluation model of IAS 16 (cumulative previous revaluations amounted to $4,000, none of which had been treated as realised at 1 July 20X2).

Solution
No longer classified as held for sale
A non-current asset that ceases to be classified as held for sale (or ceases to be included in a disposal group classified as held for sale) is measured at the lower of: (a) its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale; and (b) its recoverable amount at the date of the subsequent decision not to sell

Non-current assets to be abandoned

Non-current assets (or disposal groups) to be abandoned are not classified as held for sale, since their carrying amount will be recovered principally through continuing use. This includes non-current assets (or disposal groups) that are to be: used to the end of their economic life; or closed rather than sold. However, if the disposal group meets the definition of a discontinued operation , it is presented as such at the date it ceases to be used.

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First time issued in 2009 Total paragraphs 45

IFRS

Hammad Sarwar

Proforma disclosure on the face XYZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X3
Continuing operations Discontinued operations Entity as a whole

Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Other expenses Finance costs Share of profit of associates Profit before tax Income tax expense Profit after tax Post-tax gain on remeasurement and disposal of assets and disposal groups Profit for the period

20X3 $'000 X (X) X X (X) (X) (X) (X) X X (X) X X

20X2 $'000 X (X) X X (X) (X) (X) (X) X X (X) X X

20X3 $'000 X (X) X X (X) (X) (X) (X) X X (X) X X X

20X2 $'000 X (X) X X (X) (X) (X) (X) X X (X) X X

20X3 20X2 $'000 $'000 X X (X) (X) X X X X (X) (X) (X) (X) (X) (X) (X) (X) X X X X (X) (X) X X X X X

IFRS

Hammad Sarwar
Proforma disclosure on the face and in notes

Minimum disclosure on the face

XYZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X3

20X3 $'000 Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Other expenses Finance costs Share of profit of associates Profit before tax Income tax expense Profit for the period from continuing operations Discontinued operations Profit for the period from discontinued operations Profit for the period X (X) X X (X) (X) (X) (X) X X (X) X

20X2 $'000 X (X) X X (X) (X) (X) (X) X X (X) X

X X

X X

EXAMPLE 1 (H.A)
A&Z Co income statement for the year ended 31 December 20X1 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit before tax Income tax expense Profit for the period 20X1 $ 300,000 (100,000) 200,000 (40,000) (90,000) 70,000 (21,000) 49,000 20X0 $ 220,000 (70,000) 150,000 (30,000) (80,000) 40,000 (12,000) 28,000

IFRS

Hammad Sarwar

During the year the company ran down a material business operation with all activities ceasing on 26 December 20X1. The results of the operation for 20X0 and 20X1 were as follows: 20X1 $ 32,000 (15,000) (12,000) (10,000) (5,000) 1,500 (3,500) 20X0 $ 40,000 (19,000) (13,000) (9,000) (1,000) 300 (700)

Revenue Cost of sales Distribution costs Administrative expenses Loss before tax Income tax expense Loss for the period

The company recognised a loss of $3,000 on initial classification of the assets of the discontinued operation as held for sale, followed by a subsequent gain of $12,000 on their disposal in 20X1. These have been netted against administrative expenses. The income tax rate applicable to profits on continuing operations and tax savings on the discontinued operation's losses is 30%. Required Prepare the income statement for the year ended 31 December 20X1 for A&Z Co complying with the provisions of IFRS 5 disclosing the information on the face of the income statement.

JUNE 2010 Q2, C At 1 April 2009 Cate had a direct holding of shares giving 70% of the voting rights in Date. In May 2010, Date issued new shares, which were wholly subscribed for by a new investor. After the increase in capital, Cate retained an interest of 35% of the voting rights in its former subsidiary Date. At the same time, the shareholders of Date signed an agreement providing new governance rules for Date. Based on this new agreement, Cate was no longer to be represented on Dates board or participate in its management. As a consequence Cate considered that its decision not to subscribe to the issue of new shares was equivalent to a decision to disinvest in Date. Cate argued that the decision not to invest clearly showed its new intention not to recover the investment in Date principally through continuing use of the asset and was considering selling the investment. Due to the fact that Date is a separate line of business (with separate cash fl ows, management and customers), Cate considered that the resultsof Date for the period to 31 May 2010 should be presented based on principles provided by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. (8 marks)

IFRS

Hammad Sarwar

IAS 36 Q2 DEC 2009 There are specific assets on which the company wishes to seek advice. The company holds certain non-current assets, which are in a development area and carried at cost less depreciation. These assets cost $3 million on 1 June 2008 and are depreciated on the straight-line basis over their useful life of five years. An impairment review was carried out on 31 May 2009 and the projected cash flows relating to these assets were as follows: Year to Cash flows ($000) 31 May 2010 31 May 2011 280 450 31 May 2012 500 31 May 2013 550

The company used a discount rate of 5%. At 30 November 2009, the directors used the same cash flow projections and noticed that the resultant value in use was above the carrying amount of the assets and wished to reverse any impairment loss calculated at 31 May 2009. The government has indicated that it may compensate the company for any loss in value of the assets up to 20% of the impairment loss. Key holds a non-current asset, which was purchased for $10 million on 1 December 2006 with an expected useful life of 10 years. On 1 December 2008, it was revalued to $88 million. At 30 November 2009, the asset was reviewed for impairment and written down to its recoverable amount of $55 million. Key committed itself at the beginning of the financial year to selling a property that is being under-utilised following the economic downturn. As a result of the economic downturn, the property was not sold by the end of the year. The asset was actively marketed but there were no reasonable offers to purchase the asset. Key is hoping that the economic downturn will change in the future and therefore has not reduced the price of the asset. Required: Discuss with suitable computations, how to account for any potential impairment of the above non-current assets in the financial statements for the year ended 30 November 2009. (15 marks) Note: The following discount factors may be relevant Year Year Year Year 1 2 3 4 09524 09070 08638 08227

IFRS

Hammad Sarwar

DEC 2007 Q3 A IFRS 5 IAS 36

Ghorse, a public limited company, operates in the fashion sector and had undertaken a group reorganisation during the current financial year to 31 October 2007. As a result the following events occurred: (a) Ghorse identified two manufacturing units, Cee and Gee, which it had decided to dispose of in a single transaction. These units comprised non-current assets only. One of the units, Cee, had been impaired prior to the financial year end on 30 September 2007 and it had been written down to its recoverable amount of $35 million. The criteria in IFRS5, Non-current Assets Held for Sale and Discontinued Operations, for classification as held for sale, had been met for Cee and Gee at 30 September 2007. The following information related to the assets of the cash generating units at 30 September 2007: Depreciated Fair value less Carrying value historical cost costs to sell under IFRS and recoverable Amount $m Cee Gee 50 70 120 $m 35 90 125 $m 35 70 105

The fair value less costs to sell had risen at the year end to $40 million for Cee and $95 million for Gee. The increase in the fair value less costs to sell had not been taken into account by Ghorse. (7 marks)

DEC 2007 Q3 A
A subsidiary company had purchased computerised equipment for $4 million on 31 October 2006 to improve the manufacturing process. Whilst re-organising the group, Ghorse had discovered that the manufacturer of the computerised equipment was now selling the same system for $25 million. The projected cash flows from the equipment are: Year ended 31 October Cash flows $m 2008 2009 2010 13 22 23

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Hammad Sarwar
The residual value of the equipment is assumed to be zero. The company uses a discount rate of 10%. The directors think that the fair value less costs to sell of the equipment is $2 million. The directors of Ghorse propose to write down the non-current asset to the new selling price of $25 million. The companys policy is to depreciate its computer equipment by 25% per annum on the straight line basis. (5 marks)

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Practice questions of IFRS 5

EXAMPLE 1
An entity is committed to a plan to sell a building and has started looking for a buyer for that building. The entity will continue to use the building until another building is completed to house the office staff located in the building. There is no intention to relocate the office staff until the new building is completed. Required Would the building be classified as held for sale?

EXAMPLE 2
An entity is planning to sell part of its business that is deemed to be a disposal group. The entity is in a business environment that is heavily regulated, and any sale requires government approval. This means that the sale time is difficult to determine. Government approval cannot be obtained until a buyer is found and known for the disposal group and a firm purchase contract has been signed. However, it is likely that the entity will be able to sell the disposal group within one year. Required Would the disposal group be classified as held for sale?

EXAMPLE 3
An entity has an asset that has been designated as held for sale in the financial year to December 31, 20X5. During the financial year to December 31, 20X6, the asset still remains unsold, but the market conditions for the asset have deteriorated significantly. The entity believes that market conditions will improve and has not reduced the price of the asset, which continues to be classified as held for sale. The fair value of the asset is $5 million, and the asset is being marketed at $7 million. Required Should the asset be classified as held for sale in the financial statements for the year ending December 31, 20X6?

IFRS

Hammad Sarwar
EXAMPLE 4
An entity is reorganizing its business activities. In one location, it is stopping the usage of certain equipment because the demand for the product produced by that equipment has reduced significantly. The equipment is to be maintained in good working order, and it is expected that it will be brought back into use if the demand increases. Additionally, the entity intends to close three out of five manufacturing units. The manufacturing units constitute a major activity of the entity. All the work within the three units will end during the current year, and as of the year-end all work will have ceased. Required How will the piece of equipment and the closure of the manufacturing units be treated in the financial statements for the current year?

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EXAMPLE 5
Z plans to dispose of a group of net assets that form a disposal group. The net assets at December 31, 20X5, are Carrying value at December 31, 20X5 $m Goodwill Property, plant, and equipment Inventory Financial assets (profit of $2 million recognized in equity) Financial liabilities 6 18 10 7 (4)

On moving to accounting under IFRS, some of the assets had been transferred at deemed cost and had not been remeasured under IFRS. These assets were property, plant, and equipment, and inventory. Under IFRS, property, plant, and equipment would be stated at $16 million and inventory stated at $9 million. The fair value less costs to sell of the disposal group is $25 million. Assume that the disposal group qualifies as held for sale. Therefore, under IAS 36, any impairment loss will be allocated to goodwill and PPE. Required Describe how the disposal group would be shown in the financial statements for the year ended December 31, 20X5.

EXAMPLE 6
An entity is planning to dispose of a collection of assets. The entity designates these assets as a disposal group. The carrying amount of these assets immediately before classification as held for sale was $20 million. Upon being classified as held for sale, the assets were revalued to $18 million. The entity feels that it would cost $1 million to sell the disposal group. What would be the carrying amount of the disposal group in the entitys accounts after its classification as held for sale?

IFRS

Hammad Sarwar Additional Notes

Extension of the period required to complete a sale
B1 As noted in paragraph 9, an extension of the period required to complete a sale does not preclude an asset (or disposal group) from being classified as held for sale if the delay is caused by events or circumstances beyond the entitys control and there is sufficient evidence that the entity remains committed to its plan to sell the asset (or disposal group). An exception to the one-year requirement in paragraph 8 shall therefore apply in the following situations in which such events or circumstances arise: (a) at the date an entity commits itself to a plan to sell a non-current asset (or disposal group) it reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset (or disposal group) that will extend the period required to complete the sale, and: (i) actions necessary to respond to those conditions cannot be initiated until after a firm purchase commitment is obtained, and (ii) a firm purchase commitment is highly probable within one year. (b) an entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly impose conditions on the transfer of a non-current asset (or disposal group) previously classified as held for sale that will extend the period required to complete the sale, and: (i) timely actions necessary to respond to the conditions have been taken, and (ii) a favourable resolution of the delaying factors is expected. (c) during the initial one-year period, circumstances arise that were previously considered unlikely and, as a result, a non-current asset (or disposal group) previously classified as held for sale is not sold by the end of that period, and: (i) during the initial one-year period the entity took action necessary to respond to the change in circumstances, (ii) the non-current asset (or disposal group) is being actively marketed at a price that is reasonable, given the change in circumstances, and (iii) the criteria in paragraphs 7 and 8 are met.

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