Introduction
IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, provides the framework for dealing with assets and disposal groups designated for sale. In this post, we’ll walk through a practical example for assets held for sale, demonstrating how to aggregate carrying values, account for impairments and reversals, record the actual disposal, and address reclassification if circumstances change.
Scope and Conditions
IFRS 5 applies to all recognized non-current assets and disposal groups, except for deferred tax assets, assets arising from employee benefits, financial assets, non-current assets measured using the fair value model for investment property, non-current assets measured at fair value less costs to sell in agriculture, and contractual rights under insurance contracts, among others.
A non-current asset or disposal group is classified as held for sale when its carrying amount is expected to be recovered primarily through a sale rather than continued use.
- The asset or disposal group must be ready for immediate sale in its current condition, with only customary terms applying.
- The sale must be highly probable, meaning:
– Management at the appropriate level must have committed to a plan to sell.
– An active search for a buyer must be underway.
– The asset must be marketed at a reasonable price reflecting its current fair value. - The sale should be completed within one year from classification, unless circumstances arise that justify an extension. If the sale is expected to take longer than one year, the entity must measure the costs to sell at their present value.
- Significant changes to the plan or its withdrawal are unlikely.
Carrying amount
When an entity’s sales plan involves disposing of a group of assets in a single transaction, the entire group is classified as held for sale. Any liabilities that will be transferred as part of the same transaction are also classified as held for sale. Together, these assets and liabilities form what is referred to as a “disposal group.”
If goodwill is directly associated with the group of assets being sold, it is also classified as held for sale. This applies to cases where all or part of a cash-generating unit (CGU) that includes allocated goodwill is being disposed of.
While IFRS 5 does not provide detailed guidance on which specific assets and liabilities to include in a disposal group, it indicates that only those expected to be disposed of in the single planned sales transaction should be included. Beyond common types of non-current assets typically part of a disposal group, the following considerations can help identify other assets and liabilities to include:
If the sale is intended to be “cash and debt free,” cash, cash equivalents, and some financial liabilities may not be part of the transaction.
Deferred taxes related to the assets and liabilities of the disposal group should be included, as should any unused tax losses or credits that will be transferred to the buyer.
All liabilities expected to transfer in the single planned sale should be included in the disposal group. These may include significant non-current liabilities, such as provisions or employee benefit obligations.
This classification ensures that all relevant components of the disposal group are properly identified and accounted for as part of the planned transaction.
The mainstream method emphasizes the guidance in IFRS 5.4, which states that a disposal group “may include any assets and liabilities of the entity, including current assets.” It involves including all categories of assets and liabilities expected to be disposed of in the single transaction without further analyzing individual items within those categories. As a result, all current assets and liabilities that can be allocated to the disposal group at the reporting date are included in the disposal group. This approach simplifies the classification process and is widely applied in practice.
For illustration, let’s assume further facts about the transaction. There is a goodwill booked on the group level of which 5,000 relates to the subsidiary; furthermore per sales purchase agreement it has been noted that the Group will transfer some of its employees from the subsidiary to its other units and will not transfer related employee benefit obligations in the amount of 4,000 to the acquiror. These two items then have to be adjusted. The review also confirms that deferred tax assets relate purely to intangible assets and property, plant and equipment, and hence these balances will be transferred to the acquiror upon the sale of the subsidiary, and should be kept. Consequently, the relevant balance sheet for disposal group will look as follows:
Steps 1 and 2: Checking for impairment trigger and testing according to IAS 36 prior to reclassification
In the first step, immediately prior to a reclassification as held for sale, It is required to check if the sale of the assets is not an indicator of impairment. If it is, then impairment testing in accordance with IAS 36 needs to be performed, where carrying amount is compared to recoverable amount, which is defined as a higher of value in use and fair value less cost to sell. Here, the rules of IAS 36 apply.
In the second step, IFRS 5 requires that assets held for sale and disposal groups be measured at the lower of their carrying amount and fair value less costs to sell. This approach differs from the previous step, where impairment testing is performed under IAS 36, as value in use is not considered under IFRS 5. However, the process of writing down assets held for sale generally aligns with the impairment loss allocation rules outlined in IAS 36. Under IFRS 5, any impairment loss is first allocated to the disposal group’s goodwill (if applicable). If the impairment exceeds the goodwill balance, the remaining loss is distributed on a pro-rata basis to the non-current assets within the disposal group. While IFRS 5 does not explicitly address how to allocate a write-down that surpasses the carrying amounts of goodwill and other non-current assets within the scope of the standard, it is generally understood that any remaining impairment loss should be allocated proportionally to other current assets not excluded from the measurement scope. For instance, this could lead to an additional write-down of inventories included in the disposal group.
Let’s assume that fair value less cost to sell has been estimated at 6,000. Consequently, a following impairment charge of 6,000 (12,000 – 6,000 = 6,000) should be allocated to assets – first to goodwill, and then pro rata to relevant assets.
After all impairment tests, what would be shown in the balance sheet would be “Assets classified as held for sale” in the amount of 38,500 and “Liabilities directly associated with assets classified as held for sale” in the amount of 32,500. The amounts should not be netted off. At this point, any depreciation, amortisation, and asset revaluation should be stopped.
Step 3: Subsequent valuation at reporting dates & example of impairment reversal
IFRS 5 remeasurement as described above is carried out on the initial held for sale classification and updated at subsequent reporting dates. As mentioned above, held for sale assets that are within the measurement scope of IFRS 5 are not subsequently amortised or depreciated unless the entity withdraws from its plan to sell.
Let’s now assume that entity has performed a periodic update of the valuation, and concluded that the assets should be written up, because the counter-party has increased the binding offer, and offered to pay 8,000 instead of 6,000 (already considering costs to sell), hence leading to a potential write-up of 2,000.
In these situations, the entity may recognize a gain from reversing previous impairment losses if certain conditions are met. A prior impairment loss, recorded either under IAS 36 before classification as held for sale or under IFRS 5 after classification, must have reduced the carrying amounts of the assets in question, and any gain must not exceed the cumulative impairment losses previously recognized. Additionally, the reversal must not affect the carrying amounts of assets excluded from IFRS 5’s measurement scope, and impairment losses on goodwill cannot be reversed.
Consequently, assuming all other things being equal, and the revisions done would be as follows:
Only intangible assets and property, plant and equipment would be writte up; as regards goodwill, this is not permissible, consequently, the write up amount of 1,000 (2,000 – utilised 1,000 = 1,000) would remain unutilised.
Scenario where the transaction took place, and the assets were disposed of
The transaction went very soon after ahead, and the entity was disposed of, and the Group received the eventual cash amount of 8,500 as even slightly better terms have been negotiated. In this case, it is necessary to remove the carrying amounts of the assets and liabilities included in the disposal group from the statement of financial position. Accounting entries would look as follows:
Scenario where the transaction has not occurred and will not occur
If an entity determines that a previous held for sale classification for an asset or a disposal group is no longer appropriate, it needs to reclassify the assets and liabilities. Firstly, the entity stops presenting the assets and related liabilities as held for sale. This change is made prospectively (ie without adjustments to comparatives). The assets and liabilities are reclassified based on their normal IFRS presentation. Secondly, assets within the measurement scope of IFRS 5 are remeasured to reflect the carrying amounts the assets would have had in the absence of the held for sale classification. This requirement also applies to individual assets that are removed from a disposal group while the disposal group continues to be measured in accordance with IFRS 5 as a whole. Any resulting gain or loss should be presented in line with the general requirements set out by IAS 1 Presentation of Financial Statements and other standards in the period that the change in the selling plan occurs. Gains or losses should be presented as part of the results of continuing operations, except where the gain or loss relates to assets that are accounted for in accordance with the revaluation model in IAS 16 Property Plant and Equipment or IAS 38 Intangible Assets. In this case, the gain or loss is treated as a revaluation increase or decrease.
Conclusion
IFRS 5 offers clear guidance for dealing with assets and disposal groups held for sale, from initial classification to disposal or reclassification. Through this example, we’ve explored how to aggregate carrying values, handle impairments and reversals, and properly account for disposals or changes in plans.