Understanding IFRS 5 - Non-current Assets Held for Sale And Discontinued Operations (2024)

Introduction

IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations outlines the accounting treatment for non-current assets held for sale and discontinued operations. The main objective of this Standard is to ensure that assets held for sale are presented separately in the financial statements, and that the results of discontinued operations are disclosed separately.

Meaning of Non-current Assets Held for Sale

Non-current assets held for sale are long-term assets that a company intends to sell in the near future, typically within one year. These assets are considered to be held for sale when the company has made a decision to sell them, and has initiated a plan to do so.

To be classified as held for sale, the assets must meet certain criteria. Specifically, they must be available for immediate sale in their current condition, and the sale must be highly probable within one year from the date of classification.

Examples of non-current assets that might be classified as held for sale include property, plant, and equipment, intangible assets, and investment properties. When an asset is classified as held for sale, it is typically measured at the lower of its carrying amount (i.e., its book value) and fair value less costs to sell.

Meaning of Discontinued Operations

Discontinued operations refer to a business segment or line of business that a company has either sold or intends to sell, and that represents a significant component of the company's operations. A discontinued operation is a part of a company's business that has been or will be disposed of, and which the company will no longer have control over once the disposal is complete.

To be classified as a discontinued operation, the segment or line of business must meet certain criteria, including that it must be a separate major line of business or geographical area of operations, and that it must be distinguishable from the rest of the company's operations in terms of its operations and financial performance.

Once a business segment or line of business has been classified as a discontinued operation, it is presented separately in the company's financial statements. Specifically, the results of the discontinued operation are reported as a single line item in the income statement, which includes the results of operations up until the date of disposal, as well as any gain or loss on disposal. The assets and liabilities associated with the discontinued operation are also presented separately on the statement of financial position as "discontinued operations."

It's important to note that the accounting treatment for discontinued operations is different from that for non-current assets held for sale. Non-current assets held for sale are individual assets that are being sold, while discontinued operations refer to a business segment or line of business that is being disposed of.

Key Issues in IFRS 5

Some of the key issues that arise in the application of IFRS 5 include:

• Classification of assets as held for sale: One of the key issues in the application of IFRS 5 is determining whether an asset or disposal group is classified as held for sale. This requires assessing whether the sale of the asset or disposal group is highly probable and whether it will be recovered principally through a sale transaction.
• Measurement of assets held for sale: Another key issue is the measurement of assets held for sale. IFRS 5 requires that assets held for sale be measured at the lower of carrying amount and fair value less costs to sell, which can be difficult to determine, particularly in a volatile market environment.
• Timing of recognition of impairment losses: IFRS 5 requires that impairment losses on assets held for sale be recognized immediately in the income statement. However, determining the amount of the impairment loss and the timing of its recognition can be complex and may require significant judgment in accordance with IFRS 36 – Impairment of Assets.
• Presentation of discontinued operations: IFRS 5 requires that the results of discontinued operations be presented separately in the income statement. However, determining which operations should be classified as discontinued and how to present the results of those operations can be challenging.
• Disclosure requirements: IFRS 5 includes significant disclosure requirements related to assets held for sale and discontinued operations. Meeting these disclosure requirements can be difficult, particularly for companies with complex operations or significant divestiture activities.

Overall, the application of IFRS 5 requires significant judgment and may be challenging for companies that hold non-current assets for sale or that have discontinued operations. Companies must carefully consider the requirements of the standard and ensure that they are properly accounting for and disclosing these transactions in their financial statements.

Criteria for Recognizing Non-current Assets Held for Sale

To recognize an asset as held for sale, the following criteria must be met:

• Management has committed to a plan to sell the asset. The plan must be highly probable and the asset must be available for immediate sale in its present condition.
• The asset is available for immediate sale in its present condition. This means that the asset is being actively marketed for sale, and any restrictions on the sale of the asset have been removed.
• An active market exists for the asset. This means that there are potential buyers for the asset and that the price of the asset is expected to be reasonable.
• The sale of the asset is expected to be completed within one year from the statement of financial position date. If the sale is expected to take longer than one year, the asset should not be classified as held for sale.
• The asset is unlikely to be withdrawn from sale or its sale plan cancelled. Any changes to the sale plan after the asset has been classified as held for sale could result in the asset being reclassified as non-current assets held for use.

Once an asset meets all of these criteria, it should be classified as non-current assets held for sale on the statement of financial position, and should be measured at the lower of its carrying amount or fair value less costs to sell. Any impairment losses recognized on the asset prior to classification as held for sale should be reversed.

Criteria for Recognizing Discontinued Operations

The criteria for recognizing discontinued operations are as follows:

• The component must be a separate major line of business or geographical area of operations.
• The component must have been disposed of or classified as held for sale. The decision to dispose of the component must have been made and announced publicly.
• The disposal of the component must represent a strategic shift that will have a major impact on the entity's operations and financial results. This means that the disposal must have a significant effect on the entity's operations, such as a change in the nature and focus of its business activities.
• The component must be part of a single coordinated plan to dispose of all the assets and liabilities of the component.

Once a component meets all of these criteria, it should be classified as discontinued operations in the financial statements for the current and prior periods. The financial statements should also include a description of the component, the reason for its disposal, and the financial effects of the disposal, including any gain or loss on disposal. Any income or expense from the discontinued operation should be reported separately from the entity's continuing operations on the income statement.

Accounting Treatment for Non-Current Assets Held For Sale

The accounting treatment for non-current assets held for sale involves the following steps:

• Measurement: Non-current assets held for sale are measured at the lower of their carrying amount (i.e., the book value) and their fair value less costs to sell. Fair value is the amount that could be obtained from the sale of an asset in an arm's length transaction between knowledgeable, willing parties.
• Depreciation: Depreciation ceases from the date when the asset is classified as held for sale.
• Impairment: If the carrying amount of the asset is greater than its fair value less costs to sell, an impairment loss must be recognized in the income statement.
• Disclosure: The Company must provide sufficient disclosures in the notes to the financial statements, including the nature of the assets, the reasons for their sale, and the expected timing of the sale.

Additionally, any gains or losses on the sale of non-current assets held for sale are recognized in the income statement when the sale is completed.

Accounting Treatment for Discontinued Operations

The accounting treatment for discontinued operations involves the following steps:

• Separation: The results of the discontinued operation should be separated from the results of the ongoing operations in the income statement, and presented as a single line item.
• Measurement: The assets and liabilities of the discontinued operation should be measured at their carrying amounts on the date of the disposal.
• Impairment: If the carrying amount of the assets of the discontinued operation is greater than their recoverable amount, an impairment loss should be recognized in the income statement.
• Disclosure: The Company must provide sufficient disclosures in the notes to the financial statements, including the nature of the discontinued operation, the reasons for its disposal, and the expected timing of the disposal.
• Gain or loss on disposal: Any gain or loss on the disposal of the discontinued operation should be recognized in the income statement.

It's important to note that the results of a discontinued operation are only presented in the financial statements up to the date of the disposal. After the disposal, the results of the discontinued operation should be removed from the financial statements, and only the gain or loss on disposal should be included. Additionally, any cash flows associated with the discontinued operation should be separately disclosed in the statement of cash flows.

Measurement of Non-current Assets Held for Sale

Non-current assets held for sale are measured at the lower of their carrying amount (i.e., the book value) and their fair value less costs to sell. Fair value is the amount that could be obtained from the sale of an asset in an arm's length transaction between knowledgeable, willing parties, as per IFRS 13 – Fair Value Measurement.

The carrying amount of a non-current asset held for sale includes its historical cost less accumulated depreciation and any impairment losses recognized before it was classified as held for sale. The fair value less costs to sell includes the estimated selling price less any costs that would be directly attributable to the sale, such as legal fees, commissions, and marketing expenses.

It's important to note that the fair value less costs to sell is an estimate and requires judgment and estimation techniques to determine. In addition, it should be regularly reviewed and updated until the sale of the asset is completed. Any changes in the fair value less costs to sell should be recognized in the income statement as they occur.

If the carrying amount of the non-current asset held for sale exceeds its fair value less costs to sell, an impairment loss must be recognized in the income statement. However, if the fair value less costs to sell subsequently increases and the increase can be objectively attributed to an event occurring after the initial measurement, the impairment loss should be reversed, up to the amount of the original impairment loss.

Measurement of Discontinued Operations

The measurement of discontinued operations is generally performed at fair value less costs to sell. The fair value of the discontinued operation represents the amount that the component could be sold for in an orderly transaction between market participants at the measurement date. Costs to sell represent the incremental direct costs associated with disposing of the component, including legal fees, real estate commissions, and other transaction costs.

The measurement of the results of discontinued operations also includes any adjustments that are required to reflect the impact of the disposal or held-for-sale classification. These adjustments may include the recognition of impairment losses, provisions for restructuring or other exit costs, and any gain or loss on the disposal of the component.

Once the measurement of discontinued operations is complete, the results are presented as a single line item on the income statement, separately from the results of continuing operations. The income statement should disclose the nature and amount of any significant gains or losses recognized on the disposal or held-for-sale classification of the discontinued operation, as well as any other significant items that relate to the discontinued operation.

It is important for companies to properly account for and disclose discontinued operations to provide users of financial statements with relevant information about the company's past and future operations. Accurate measurement and disclosure of discontinued operations can help users understand the impact of these strategic decisions on the company's financial performance and position.

Presentation of Non-Current Assets Held For Sale

The presentation of non-current assets held for sale in the statement of financial position includes the following:

• Assets held for sale: This is a separate line item presented on the face of the statement of financial position, after current assets and before non-current assets, to show the carrying amount of the assets or disposal group classified as held for sale.
• Liabilities directly associated with assets held for sale: Liabilities that are directly associated with the assets held for sale are also presented separately in the statement of financial position, under a separate line item labeled "liabilities associated with assets held for sale." These are typically short-term liabilities, such as trade payables, that will be settled as part of the sale transaction.
• Disclosure requirements: IFRS 5 requires extensive disclosures related to non-current assets held for sale, including the nature of the assets or disposal group, the expected timing of sale, the expected method of sale, the expected proceeds from the sale, and any significant risks and uncertainties related to the sale.

It is important for companies to present non-current assets held for sale in a clear and transparent manner to provide relevant information to users of financial statements. Proper presentation of these assets can help users understand the impact of the sale transaction on the company's financial position and performance.

Disclosure Requirements for Non-Current Assets Held For Sale

When non-current assets are classified as held for sale, the entity is required to disclose the following information in the financial statements:

• A description of the non-current assets held for sale, including the nature, type, and location of the assets.
• The carrying amount of the non-current assets held for sale.
• The estimated fair value less costs to sell of the non-current assets held for sale.
• The expected timing of the sale or disposal of the non-current assets held for sale.
• Any liabilities directly associated with the non-current assets held for sale.
• Any impairment losses recognized on the non-current assets held for sale prior to classification as held for sale, and any subsequent reversals of impairment losses.
• Any gain or loss on disposal of the non-current assets held for sale.
• Any other significant events or transactions related to the non-current assets held for sale.

Disclosure Requirements for Discontinued Operations

When a component of an entity is classified as a discontinued operation, the entity is required to disclose the following information in the financial statements:

• A description of the discontinued operation, including the nature and location of the operation.
• The date on which the discontinued operation was classified as such and the reasons for the disposal.
• The gain or loss recognized on the disposal of the discontinued operation, including the carrying amount of the assets and liabilities disposed of and the amount of any related taxes.
• The results of operations of the discontinued operation, including revenues, expenses, and pre-tax profit or loss for the current and prior periods.
• Any impairment losses recognized on the assets of the discontinued operation prior to classification as a discontinued operation, and any subsequent reversals of impairment losses.
• The net cash flows attributable to the operating, investing, and financing activities of the discontinued operation for the current and prior periods.
• The amounts of any significant provisions or contingencies related to the discontinued operation.
• A reconciliation of the carrying amount of the discontinued operation to the gain or loss recognized on its disposal.

The disclosure requirements are intended to provide users of financial statements with information that enables them to evaluate the timing, nature, and financial effects of the entity's decision to dispose of a component. These disclosures can help investors and creditors to assess the impact of the disposal on the entity's financial position, operating results, and cash flows, and to make informed decisions about the entity's future prospects.

Conclusion

Overall, IFRS 5 is an important standard for companies that are going through significant changes in their business operations, such as divestitures or spin-offs. By providing clear guidelines for reporting these changes, the standard helps ensure that financial statements are accurate and transparent, which is important for investors, regulators, and other stakeholders.

However, it's important to note that IFRS 5 is just one of many accounting standards that companies must comply with, and companies must also consider the impact of other standards on their financial statements. Additionally, companies must ensure that they have the necessary expertise and resources to properly implement and comply with IFRS 5, as failure to do so can result in financial and reputational harm.