IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations (Vocabulary Flashcards)

Classification as Held for Sale

• IFRS 5 covers: non-current assets held for sale, disposal groups, and discontinued operations.

• Definitions:

  • Non-current assets held for sale: individual assets or groups of assets intended for disposal in a single transaction.

  • Disposal group: a group of assets and associated liabilities to be disposed of together in a single transaction (e.g., a branch).

  • Discontinued operation: a disposal group or part of a disposal group that has ceased to be part of the reporting entity’s business or is intended for sale; may also be a subsidiary acquired exclusively with a view to resale and disposal involves loss of control.

• Key takeaway: IFRS 5 aggregates the effects of a disposal group or held-for-sale asset into a single line item to reflect the entity’s decision to exit a particular line of business or geographic area.

Classification as Held for Sale: WHEN?

• Criteria for a disposal group or asset to be classified as held for sale:

  • Available for immediate sale; and

  • Sale is highly probable.

• Management criteria to meet:

  • The appropriate level of management is committed to the plan to sell;

  • An active programme to locate a buyer is underway;

  • Asset (or disposal group) is being marketed at a price that is reasonable relative to its current fair value;

  • Sale is expected to complete within one year from the date of classification (with some exceptions).

• Implication: Both criteria must be satisfied for classification as held for sale.

Classification as Held for Sale: STATEMENT OF FINANCIAL POSITION (SFP) effects

• Assets held for sale: presented as a single line in current assets.

• Liabilities: a single line in current liabilities directly associated with assets classified as held for sale.

• No offsetting between assets and liabilities.

• Example structure:

  • Assets: Assets held for sale

  • Liabilities: Liabilities directly associated with assets held for sale

• This presentation aids users in evaluating the balance sheet impact of the exit strategy.

Measurement: THREE IMPORTANT STAGES

• 1) Decision to sell (before HFS classification):

  • Determine impairment and impairment testing under IAS 36 as needed for disposal groups that are not yet classified as held for sale.

• 2) At HFS classification:

  • Measure all assets and liabilities in the disposal group according to their applicable IFRS (e.g., IAS 36 impairment, IAS 16 depreciation, etc.).

  • Update impairment under IAS 36 if required.

  • Stop amortization/depreciation for assets within the disposal group.

  • Apply the rule: lower of carrying amount and fair value less costs to sell (FVLCTS).

• 3) Costs to sell:

  • Defined as: "the incremental costs directly attributable to the disposal of an asset (or disposal group), excluding finance costs and income tax expenses".

• Core measurement formula at HFS:

  • First, compute the amount to carry at the lower of two values: the asset’s carrying amount (CA) and its FV less costs to sell (FVLCTS):

  • $ext{Carrying value at HFS} = ext{min}( ext{CA}, ext{FVLCTS})$

• Costs to sell definition and practical impact:

  • Costs to sell reduce the fair value measurement used to determine the lower-of-carrying vs. FVLCTS.

Practical Question: Allocation of Impairment When Measuring at the Lower of FVLCTS and the Carrying Value (CV)

• At HFS classification, compute the impairment of the disposal group as the difference between its carrying value just before classification and its recoverable amount (IFRS 5 implies impairment if recoverable amount is less than CV).

• Impairment calculation (concept):

  • $ext{Impairment} = ext{max}(0, ext{CA} - ext{RecoverableAmount})$

• Allocation of impairment within the disposal group (pro-rata across assets within IFRS 5 measurement scope):

  • Let S be the set of assets within the IFRS 5 measurement scope.

  • Total impairment to allocate: $ext{ImpairmentTotal} = ext{sum of required impairments across assets in S}$

  • Allocation to asset i in S:

  • $riangle ext{CV}<em>i = ext{ImpairmentTotal} imes rac{ ext{CV}</em>i}{ ext{Sum}<em>{j o S} ext{CV}</em>j}$

  • New CV for asset i: $ext{CV}<em>{i, ext{after}} = ext{CV}</em>i - riangle ext{CV}_i$

• Goodwill is affected by impairment allocated within the disposal group, but guidance notes that impairment allocated to goodwill within the scope is included in the overall impairment of the disposal group.

Subsequent Measurement (Subsequent to HFS classification)

• At each reporting date after HFS classification:

  • Assets and liabilities outside the IFRS 5 scope are measured under their respective IFRS standards.

  • For assets within the scope, assess impairment using the lower of CV and FVLCTS again, but note:

  • If an impairment loss previously recognized exists on non-goodwill assets, any reversal is allowed up to the extent that the new recoverable amount exceeds the carrying value, subject to impairment reversal rules.

  • Impairment reversals are permitted for most assets (except goodwill) but are limited by the new recoverable amount and never reverse previously recognized goodwill impairment.

  • Rule summary:

  • $ext{New carrying value} = ext{min}( ext{CV}, ext{FV} - ext{costs to sell})$

  • If there is an impairment loss, recognize it; if recoverable amount increases, recognize a reversal for assets other than goodwill, constrained by past impairments and not exceeding original carrying amounts (for assets other than goodwill).

Discontinued Operation: An Overview

• A discontinued operation is a component of an entity that has been disposed of or is classified as held for sale and:

  • represents either a separate major line of business or geographical area of operations, or

  • is part of a single coordinated plan to dispose of a separate major line of business or geographical area, or

  • is a subsidiary acquired exclusively with a view to resale and disposal involves loss of control.

• Presentation:

  • The results of a discontinued operation are presented as a single line item, net of tax, in the income statement.

  • The line item includes the post-tax result of the operation, the measurement impact, and any gain or loss upon disposal when realized.

• Cash flow presentation:

  • Discontinued operation cash flows are presented in the cash flow statement as part of operating, investing or financing activities, depending on their nature.

• Comparative information:

  • Balance sheet and income statement/cash flow statements are presented with comparatives to reflect the discontinued operation separately for prior periods as required.

• General principle:

  • The Group’s net profit should not be distorted by discontinuation; intercompany balances and transactions are eliminated within the DO to present a clean comparison of continuing vs. discontinuing activities.

  • The overarching aim is to enable users to evaluate the financial effects of the Discontinued Operations distinctly from continuing operations.

Presentation: The Discontinued Operation (Details)

• The DO is shown with a separate line item on the income statement after tax, representing:

  • The post-tax profit or loss of the DO;

  • The impact of any impairment in the DO before disposal;

  • The gain or loss on disposal when it occurs.

• On the cash flow statement, the DO’s cash flows are segregated into the sections corresponding to the DO’s activities.

• On the balance sheet, comparative information is provided to allow users to compare continuing and discontinued operations across periods.

• Group-level note: The Group’s total net profit for the period should not be affected by the DO, ensuring comparability for continuing operations while still disclosing the DO clearly.

Presentation: Additional Guidance (User Understanding)

• The IFRS 5 framework is designed to enable users to evaluate the effects of exiting a particular line of business or geographic area.

• Intercompany balances and transactions involving the DO should be eliminated to avoid double-counting.

• The DO requires clear separation from continuing operations for decision-useful reporting.

Exercises and Illustrative Examples

Exercise 1: CGU (Impairment Test) – Scenario and Results

• Given CGUs Paris and Milan under a holding entity, with the following data (Euro million):

  • Carrying value as of 1 March before impairment test: Paris = 500, Milan = 700, Total = 1,200.

  • Recoverable amount as of 1 March: Paris = 900, Milan = 500, Total = 1,400.

  • Impairment (on a CGU basis): Paris = 0, Milan = 200.

• Results after impairment test on 1 March:

  • Carrying value as of March 1 after impairment test: Paris = 500, Milan = 500, Total = 1,000.

• Then, at 15 September (HFS classification):

  • Carrying value before impairment: Paris = 500, Milan = 500, Total = 1,000.

  • Recoverable amount: Paris = 1,000, Milan = 495, Total = 1,495.

  • Impairment recognized on Milan = 5 (to reflect the reduced recoverable amount).

  • Carrying value after impairment test (Sept 15): Paris = 500, Milan = 495, Total = 995.

• Key takeaway: Impairment is recognized where recoverable amount is less than carrying value; subsequent measurement may adjust values if recoverable amounts change.

Exercise 2: Impairment Loss Allocation – Allocation within the Disposal Group

• Given an impairment scenario with a disposal group and the following items (Book Value 1 Nov): Goodwill = 2, Intangible = 20, PPE = 60, Deferred tax = 17, AFS = 56, Inventory = 10, Receivables = 60, Cash = 38. Total assets = 263. Liabilities = 153. Net value of Milan hotel = 110.

• Allocation of loss at 1 Nov (impairment to be allocated across assets within the IFRS 5 scope):

  • Goodwill: 2; Intangible: 2; PPE: 6; Deferred tax: remains 17 (not allocated within scope); AFS: remains 56; Inventory: remains 10; Receivables: remains 60; Cash: remains 38.

  • This shows which assets are within the IFRS 5 measurement scope and eligible for pro-rata allocation (Yes, pro-rata) vs outside the scope (No).

• Carrying values after HFS classification (1 Nov post-allocation):

  • Goodwill becomes 0 (2 − 2 = 0);

  • Intangible becomes 18 (20 − 2 = 18);

  • PPE becomes 54 (60 − 6 = 54);

  • Deferred tax remains 17; AFS remains 56; Inventory remains 10; Receivables remain 60; Cash remains 38.

  • Total assets after impairment allocation within scope: 253.

• Net value of Milan hotel after adjustment: 100 (initially 110, minus 10 impairment allocated to scope items that affect Milan);

• Answer summary (final position at HFS classification):

  • Net value of Milan hotel = 100.

  • This illustrates pro-rata impairment allocation within IFRS 5 scope and treatment of assets outside the scope.

Key Formulas and Concepts (Reminders)

• Lower of carrying amount and fair value less costs to sell (FVLCTS):

  • $ext{Carrying at HFS} = ext{min}( ext{CA}, ext{FVLCTS})$

• Costs to sell:

  • Defined as: "the incremental costs directly attributable to the disposal of an asset (or disposal group), excluding finance costs and income tax expenses".

• Impairment calculation for a disposal group at HFS:

  • $ext{ImpairmentTotal} = ext{CA}_{ ext{before}} - ext{RecoverableAmount}$ if positive; otherwise zero.

• Allocation of impairment within S (pro-rata):

  • $riangle ext{CV}<em>i = ext{ImpairmentTotal} imes rac{ ext{CV}</em>i}{ ext{sum}<em>{j o S} ext{CV}</em>j}$

• Subsequent measurement (post-classification):

  • For assets within scope: $ext{NewCV} = ext{min}( ext{CurrentCV}, ext{FV}_{ ext{LCTS}})$

• Re reversals and goodwill:

  • Reversals are allowed for assets other than goodwill; impairment reversals cannot exceed the amount needed to restore the asset to its carrying amount before the impairment, and cannot reverse any previous goodwill impairment (i.e., goodwill impairment is not reversable).

• Presentation principles:

  • DO presented as a separate line item post-tax in the income statement;

  • Intercompany balances within the DO are eliminated; DO aims to enable users to assess the effects of the discontinuation.

Connections and Practical Implications

• IFRS 5 ties into IAS 36 impairment testing for assets still held for sale (disposal group) and IAS 16 (depreciation) where applicable until classification.

• The classification affects the timing of impairment recognition and the potential for impairment reversals (except for goodwill).

• In practice, the timing of sale and the market conditions can significantly impact the measurement of FVLCTS and the resulting impairment losses.

• Do note the requirement to separate continuing vs. discontinued operations has important implications for investors evaluating ongoing performance and future cash flows.

Ethical and Practical Implications

• Transparent classification and clear presentation reduce manipulation or misinterpretation of a company’s exit strategies.

• Consistency in applying impairment allocation (pro-rata within scope) improves comparability across entities and periods.

• The separation of DO from continuing operations aids in decision-making for stakeholders, including capital providers and regulators.

Quick Reference: IFRS 5 Key Points

• Scope: non-current assets, disposal groups, and discontinued operations.

• Held for sale criteria: available for immediate sale AND sale highly probable.

• Measurement at HFS: lower of CA and FVLCST (FV less costs to sell).

• Costs to sell: incremental, direct disposal costs; exclude finance costs and income taxes.

• Impairment: recognize if recoverable amount < CA; allocate impairment pro-rata to assets within the IFRS 5 scope; goodwill impairment not reversible.

• Discontinued operations: separate line item post-tax; clear presentation in income statement and cash flows; comparatives reflect the DO.

• Subsequent measurement: assets outside IFRS 5 scope stay under their standards; within scope, reconsider impairment with reversals allowed (except for goodwill).

• Illustrative numbers from Exercises illustrate CGU impairment, HFS classification, and impairment allocation across assets within a disposal group.

End of Notes

IFRS 5 governs non-current assets held for sale, disposal groups, and discontinued operations, aiming to aggregate their effects for clear reporting.

Classification Criteria

Assets or disposal groups are classified as held for sale if they are:

• Available for immediate sale in their current condition, AND

• Their sale is highly probable, evidenced by management commitment, an active buyer search, reasonable pricing relative to fair value, and an expected completion within one year (with exceptions).

Statement of Financial Position (SFP) Effects

Assets held for sale are presented as a single current asset line, and directly associated liabilities as a single current liability line, without offsetting.

Measurement and Impairment

1. Before HFS classification: Conduct impairment testing under IAS 36.

2. At HFS classification:

   • Measure assets and liabilities by their respective IFRS standards.

   • Stop depreciation/amortization for assets within the disposal group.

   • Measure the asset or disposal group at the lower of its carrying amount (CA) and fair value less costs to sell (FVLCTS): $\min(\text{CA}, \text{FVLCTS})$.

   • Costs to sell are incremental, direct disposal costs, excluding finance costs and income tax expenses.

   • Impairment is recognized if CA exceeds the recoverable amount. The total impairment is allocated pro-rata to assets within the IFRS 5 scope, with goodwill impairment being non-reversible.

3. Subsequent Measurement: At each reporting date, re-assess impairment using the lower of CV and FVLCTS. Impairment reversals are permitted for non-goodwill assets, limited by the new recoverable amount and prior original carrying amounts.

Discontinued Operations (DO)

A discontinued operation is a component that has been disposed of or classified as held for sale, representing a major line of business or geographical area, or a subsidiary acquired for resale where disposal leads to loss of control.

Presentation of DO

• Presented as a single post-tax line item in the income statement, including profit/loss from operations, measurement impacts, and disposal gains/losses.

• Cash flows are segregated in the cash flow statement.

• Comparative information in financial statements is re-presented to reflect the discontinued operations separately.

• Intercompany balances within the DO are eliminated to ensure comparability.