Lecture 10 - IFRS 5 Non-current assets held for sale and discontinued operations

What does IFRS 5 cover?

1. Non-current assets held for sale

2. Discontinued operations

What is the objective of IFRS 5?

To specify the:

• Accounting

• Presentation

• Disclosure

of assets held for sale and discontinued operations

What two main topics are covered in IFRS 5?

1. Non-current assets held for sale

2. Discontinued operations

When is an asset classified as held for sale?

When its carrying amount will be recovered mainly through a sale rather than through continued use

Easy memory rule for held-for-sale?

Sell, not use

What type of asset can be classified as held for sale?

• A single non-current asset

• A disposal group

What is a disposal group?

A group of assets and liabilities to be sold together

Two big requirements for held-for-sale classification?

• Available for immediate sale

• Sale highly probable

What must management be committed to?

A plan to sell the asset

What must management be doing regarding a buyer?

Actively looking for a buyer

What must be true about the selling price?

It must be reasonable relative to fair value

When must sale be expected?

Within one year

What must be unlikely about the sale plan?

That the plan will be withdrawn

Quick memory for criteria?

MAPS

M → Management committed
A → Available immediately
P → Probable sale
S → Sale within 1 year

What is the IFRS 5 measurement rule?

Lower of carrying amount and fair value less costs to sell

What is carrying amount?

The book value of the asset in financial statements

What is fair value less costs to sell?

Expected selling price minus selling costs

When must expected losses be recognised?

Immediately in profit or loss

Can expected gains be recognised immediately?

No - Gains are recognised only when realised

Why can gains not be recognised early?

Because profit is uncertain until sale occurs

What happens to depreciation once an asset is held for sale?

Depreciation stops

Why does depreciation stop?

Because the asset is no longer used in operations

(not generating economic benefits)

Which accounting standard no longer applies to the asset?

IAS 16 (for PPE)

What must happen before classification if the asset uses the revaluation model?

Perform a death-bed revaluation

What is a death-bed revaluation?

A final revaluation immediately before classification as held for sale

How are revaluation gains or losses treated?

Under IAS 16 revaluation rules

What happens after the death-bed revaluation?

Asset is remeasured to fair value less costs to sell

How are costs to sell recognised?

As expenses

Where are held-for-sale assets presented?

Separately in the statement of financial position

Why must held-for-sale assets be presented separately?

Because they will be sold rather than used in operations

Are held-for-sale assets still non-current assets?

No — they are shown separately

What must be disclosed for held-for-sale assets?

• Description of the asset

• Facts and circumstances of the sale

• Expected disposal timing

• Any loss recognised

What rule applies after classification when value changes?

Continue using lower of carrying amount and fair value less costs to sell

What happens if fair value less costs to sell decreases? (or less than carrying amount)

Impairment loss recognised

Where is the impairment recorded?

Profit or loss

When the asset is sold what is recognised?

Gain or loss on disposal

Why are discontinued operations shown separately?

To separate future operations from those that will not continue

Why is this useful for investors to seperate discontinued operations?

It helps predict future company performance

What is a discontinued operation?

A component of an entity disposed of or held for sale

What must the component represent?

A separate major line of business or geographical area

Another qualifying case?

A subsidiary acquired exclusively for resale

Another qualifying case?

A subsidiary acquired exclusively for resale

What is a component of an entity?

Operations with separate identifiable cash flows

What accounting concept is similar to this?

Cash-generating unit (CGU)

Does a single asset qualify as discontinued operation?

No

Why doesn’t a single asset qualify as a discontinued operation?

Because discontinued operations must represent a business component

Do abandoned assets qualify as held for sale?

No

How are discontinued operations shown in the income statement?

As one single amount after tax

What does the single amount include?

• Post-tax profit/loss of discontinued operations

• Gain or loss on disposal

What detailed breakdown must be disclosed?

• Revenue

• Expenses

• Pre-tax profit or loss

• Income tax expense

If discontinued operation is already disposed by year-end?

No related assets or liabilities remain

If classified as held for sale but not yet sold?

Show separately under current assets/liabilities

What cash flow information must be disclosed?

Net cash flows from:

• Operating activities

• Investing activities

• Financing activities

If assets are not available for immediate sale, can they be held for sale?

No

What should be done instead?

Continue normal accounting but test for impairment

When will results be shown as discontinued operations?

Once the operation is closed or classified as held for sale

Most important IFRS 5 rule to remember?

Lower of carrying amount and fair value less costs to sell