The common feature of non-current assets held for sale and disposal groups is that the carrying value is expected to be realised through a sale transaction rather than through
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continuing use. Non-current assets held for sale includes all individual assets that are not classified as current. A non-current asset held for sale can be for example a head office building, a patented drug, a cargo ship or a brand. A disposal group, in simple form, might be a fleet of aircraft or a collection of properties held for sale .
What are disposal groups?
A disposal group is a group of assets that are to be disposed of along with related liabilities that are to be transferred. Expressed more simply, it is often a business or a part of a business or cash generating unit. A disposal group can include current assets, non-current assets within the measurement scope of IFRS 5, non-current assets outside the measurement scope of IFRS 5 and related liabilities. Classification as a disposal group, for groups of individual assets or businesses, depends on the sale being part of a single co-ordinated disposal plan (a disposal plan) and meeting a number of other criteria .
What are discontinued operations?
A discontinued operation is a disposal group that meets certain specific criteria. Discontinued operations are a subset of disposal groups that are measured in the same way as disposal groups but have different presentation and disclosure requirements. A discontinued operation is a disposal group that is a major line of business or geographical area of operations as well as being held for sale as part of a disposal plan . It will have been a cash-generating unit or a group of cash-generating units while being held for use. A consistent approach for identifying cash-generating units under IAS 36 and IFRS 5 is required. A subsidiary acquired exclusively with a view to resale is also a discontinued operation.
The major line of business or geographical area of operations criteria are usually satisfied if the operation is a reportable business or geographic segment .
Initial recognition (classification) as held for sale
The non-current asset or disposal group is classified as held for sale when it is immediately available for sale in its present condition and the sale is highly probable. The held for sale criteria must be met at or before the balance sheet date; retrospective classification as held for sale, when the conditions are met subsequent to the balance sheet date, is prohibited.
Immediately available for sale
This condition is satisfied when management has the intention to sell the asset or disposal group and the ability to transfer it to the buyer in its present condition; i.e. only normal procedures are required for the sale of the asset. The legal formalities associated with the sale of land are an example of normal procedures .
Sale is highly probable
The second condition to meet ‘held for sale’ is that the sale must be highly probable. The standard defines ‘highly probable’ as ‘significantly more likely than probable’. This creates a high threshold of certainty before recognition as ‘held for sale’. IFRS 5 expands on this requirement with some specific conditions [IFRS5.8]:
a)
Management at the appropriate level must be committed to a plan to sell
b)
an active programme to locate a buyer and to complete the plan to
sell has been initiated;
c)
the asset or disposal group is being actively marketed, and is being
offered for a reasonable price in relation to its fair value;
d)
the actions required to complete the plan should indicate that it
is unlikely that significant changes will be made to the plan and the
plan is not likely to be withdrawn; and
e)
it is forecast that the sale will be completed within one year.
Management may have the intention to shed assets or a disposal group before the criteria to classify as held for sale are met. The intention to dispose of assets does not mean that the held for sale criteria are met. It can be difficult to demonstrate that management is committed to a plan to sell or the plan will not change since there will seldom be any irrevocable commitment to a third party in advance of a sale agreement. Commitment can be supported through public announcements, regulatory filings, the acquisition of replacement assets and documentation of board level approvals .
Assets acquired with intent to dispose
An entity may acquire assets or businesses as part of a business combination that it intends to sell. This may be because of regulatory requirements, anti-trust rules or because they are not of interest to the acquirer. The requirements to be classified as held for sale are practically impossible to meet at the date of acquisition because of the requirements to actively market and for the asset or disposal group to be immediately available for sale. Therefore, management has a short period (three months is used in the standard) from the date of acquisition to meet the criteria as held for sale. Assets or disposal groups that meet the criteria within the three months are not measured at fair value in accordance with IFRS 3. Rather, they are measured in the acquisition date balance sheet at fair value less cost to sell as is further described below (See Measurement on initial recognition) .
What is a 'sale'?
Disposal through sale includes asset exchanges where the exchanges have commercial substance [IFRS5.10] as described in both IAS 16(R05) and IAS 38(R05). However, the distribution of assets to shareholders or a spin off that does not include a sale does not constitute a sale transaction . Abandonment of assets or a business also does not qualify as a sale so the asset or disposal group will not be classified as held for sale. An abandoned business cannot be treated as a discontinued operation until it has actually been abandoned. However, it may meet the criteria when abandoned for a discontinued operation and be subject to the relevant presentation and disclosure requirements.
Within one year
The sale of the assets or disposal group should be expected to qualify for recognition as a completed sale within one year from the date of classification as held for sale. An extension beyond one year is allowed in certain limited circumstances.
Management may be aware of conditions that will extend the sale period at the time it offers the asset or disposal group for sale. These conditions cannot be any imposed by the seller . Seller imposed conditions would mean that ‘immediately available’ criterion would not be met. The held for sale criteria can still be met if the conditions cannot be addressed until after a firm purchase commitment is obtained and a firm purchase commitment is expected within one year .
Conditions that will extend the period of sale may also arise subsequent to a firm purchase commitment being in place. These conditions would either be unexpected or had been previously thought to be unlikely to arise .
Piecemeal disposals
An entity may exit a particular activity or rationalise its operations through a series of transactions. A plan of this type needs to be analysed to determine if piecemeal disposals should be considered as a single plan of disposal and thus all of the assets and liabilities meet the held for sale criteria at the same point . When assets or disposal groups meet the ‘held for sale’ criteria at different points, it is usually evidence that there is not a single coordinated plan for disposal .
Partial disposals
The sale of part of an asset does not fall within the scope of IFRS 5 as it is not an asset held for sale or a disposal group, as the carrying amount will not be recovered principally through sale. The planned sale of an entire subsidiary, associate or AFS may qualify for held for sale treatment if all the relevant criteria are met. However, it is common for a group to reduce its interest in a subsidiary such that it becomes an associate or an available for sale (AFS) asset. Likewise, an associate may become an AFS asset through disposal of some of the entity’s shareholding. When the nature of a group’s investment changes then the planned disposal should be considered for treatment as held for sale . The chart below illustrates when held for sale treatment might be applied:
Nature of disposal
Held for sale?
Sale of 55% of a 100% owned subsidiary, with the remaining 45% becoming
an equity accounted associate
Yes, as the group will dispose of the assets and liabilities of the
subsidiary but will recover the carrying amount through sale of the 55%
plus an investment of 45%.
Sale of 75% of a 90% owned subsidiary. The remaining 15% is accounted
for as an AFS.
Yes, since it will be recovered principally through a sale transaction.
Sale of 30% of a 35% interest in an associate. The remaining interest
of 5% is accounted for as an AFS.
Yes, since it will be recovered principally through a sale transaction.
Sale of 40% of a 100% subsidiary. The group continues to control and
consolidate the subsidiary.
No, the group continues to control the same assets as previously but
has sold an economic interest in those assets.
Sale of 5% of a 35% owned associated. The remaining interest of 30%
continues to be classified as an associate and equity accounting is
followed.
No, since it will not be recovered principally through a sale
transaction.
Disposal through sale and leaseback
If an entity is committed to a plan to legally sell a property that is in use, and the transfer of the property will be accounted for as a sale and finance lease back, the criteria that the transfer of the asset must be expected to qualify for recognition as a completed sale within one year is not met and the property is not classified as held for sale [IFRS5.IGExample 4].
In a sale and operating lease situation the held for sale criteria can still be met.
Measurement on initial recognition
Specific measurement requirements apply to non-current assets and disposal groups once they are classified as held for sale. There is a two step process:
a)
immediately before classification as held for sale the non-current assets or disposal group (or the components thereof) are measured in accordance with the relevant standards; and
b)
the non-current asset or disposal group is measured at the lower of carrying value and fair value less cost to sell on classification as held for sale .
Any excess of carrying value over fair value less cost to sell is recorded as a loss in the income statement in the current period. Fair value less costs to sell in excess of carrying value is ignored and no gain is recorded on classification. Any losses are recorded as part of income from continuing operations unless the specific criteria for discontinued operations are also met (See Presenting discontinued operations).
The measurement requirements for a disposal group are more complex and are discussed in further detail below.
Assessment of the carrying amount immediately before classification
The carrying amounts of assets and liabilities (both individual assets and the elements of a disposal group) are measured in accordance with the applicable IFRSs immediately before the initial classification as held for sale [IFRS5.18]. This ensures that any gains, losses, depreciation or amortisation or impairments are not masked by measurement under IFRS 5. Thus depreciation and amortisation continues until the point of classification as held for sale.
An impairment test will often be required under IAS 36 for non-current assets and disposal groups at some point before classification as held for sale. A plan to dispose of an asset or cash generating unit is an internal indicator of impairment, specifically identified by the standard [IAS36.12(f)(R05)]. Management will consider disposal and prepare a plan, in most cases, well before the criteria for classification as held for sale are met. The value in use and fair value less costs to sell of an asset or CGU that is expected to be sold converge to the same number as the value will be realised from sale and the cash flows up to the point of sale will be much less significant .
Measurement of specific elements of disposal groups
A disposal group is usually a cash generating unit, a business or a portion of a business. It may contain current assets, non-current assets within the scope of IFRS 5, non-current assets outside of the scope of IFRS 5 and liabilities. The carrying value will include any goodwill where this has been allocated to the group under IAS 36. The requirement is to measure the aggregate group of assets and liabilities at fair value less costs to sell. Certain assets and liabilities within the disposal group are measured on different bases as follows:
Deferred tax assets and liabilities in accordance with IAS 12;
assets and liabilities arising from employee benefits in accordance with IAS 19 ;
non-current assets that are accounted for in accordance with the fair value model in IAS 40:
non-current assets that are measured at fair value less estimated point-of-sale costs in accordance with IAS 41;
contractual rights under insurance contracts under IFRS 4;
current assets on the relevant measurement basis;
liabilities (which continue to be measured under the relevant standards); and
non-current assets accounted for at fair value in accordance with IAS 39.
The reason for these exceptions is either that the concepts of fair value are incorporated in the standard or that measurement would cause difficulties.
The disposal group, in its entirety, forms a separate cash generating unit once it meets the held for sale criteria. The recovery of the carrying value of the disposal group is less dependent on interaction with the continuing business and will be recovered through sale. The cash flows, therefore, are separately identifiable. The carrying value of the disposal group, including allocated goodwill, is compared to the fair value less costs to sell. Any impairment losses arising are allocated to the disposal group in the same way as they would be allocated under IAS 36. Goodwill is written off first, then other non-current assets on a pro rata basis.
A disposal group or discontinued operation may have a fair value less costs to sell that is negative, i.e. the seller may be required to make cash payments to the buyer to assume net liabilities. The non-current assets and goodwill can be written down to zero but a provision for future losses cannot be recorded. There may be limited circumstances where the conditions to record a provision for an onerous contract may be met, but this situation is expected to be rare.
Costs to sell
Costs to sell are the incremental costs that are directly attributable to the disposal of an asset (or disposal group). They do not include finance costs or income tax expenses. The costs must result directly from, and be essential to, a sale transaction and would not have been incurred had the decision to sell not been made.
Stranded costs arise in many transactions where the seller incurs an expense which would otherwise have been avoided had the disposal not taken place. Stranded costs should be presented as part of the costs of the discontinued operations . Where such costs arise as a consequence of the transaction but are not essential to the transaction they do not form part of the costs to sell .
Subsequent measurement – continuing classification as held for sale
Non-current assets held for sale and disposal groups are re-measured at the lower of carrying amount or fair value less costs to sell at every balance sheet date from classification until disposal. The measurement process is similar to that which occurs on classification as held for sale. Depreciation and amortisation of tangible and intangible assets ceases on classification as held for sale. All assets and liabilities included in a disposal group but outside the measurement scope of IFRS 5 continue to be measured under the relevant standards.
The carrying value of the non-current asset or disposal group is then compared to the fair value less costs to sell at the balance sheet date [IFRS5.20]. Any excess of carrying value over fair value less costs to sell is a further impairment loss and is recognised as is described above in Measurement on initial recognition.
Fair value less costs to sell may have increased relative to carrying value since the last measurement date. Increases relating to the reversal of impairments of goodwill are ignored. This is consistent with the general prohibition in IFRS against reversals of goodwill impairment. All other increases are recognised in the income statement to the extent they reverse previously recognised impairment losses [IFRS5.22]. These losses would include impairment losses recognised under IAS 36 (prior to classification as held for sale) and losses recognised on classification as held for sale, other than goodwill.
The non-current assets or disposal group cannot be written up past its previous (pre-impairment) carrying amount, adjusted for depreciation that would have been applied without the impairment.
Subsequent measurement - reclassified to continuing use
The non-current assets or disposal group may cease to meet the held for sale criteria. Management may not be able to sell the assets for its expected price or there may be other changes in circumstances. The assets or disposal group is reclassified as held for use when the held for sale criteria are no longer met [IFRS5.26].
The assets or disposal group are re-measured as held for use at the lower of [IFRS5.27]:
a)
the carrying amount before classification as held for sale adjusted for any depreciation, amortisation or revaluations that would have been recognised if not held for sale; and
b)
the recoverable amount at the date of being returned to held for use (measured in accordance with IAS 36) .
The adjustment to re-measure the disposal group is included in the income statement as part of continuing operations [IFRS5.28].
Presentation
Presenting discontinued operations
A discontinued operation is a disposal group that is a major line of business or geographical area of operations as well as being held for sale as part of a disposal plan. The assets and liabilities of a discontinued operation are identified as such and are presented as described for disposal groups below in Presentation of the balance sheet.
The net cash flows, classified as operating, investing and financing, attributable to a discontinued operation for the current and comparative period are disclosed on the face of the cash flow statement or in the notes [IFRS5.33(c)].
A discontinued operation is presented as a single amount on the face of the income statement that includes:
a)
post tax profit or loss from discontinued operations;
b)
the post tax gain or loss recognised in the re-measurement to fair value less costs to sell; and
c)
when realised, the post tax gain or loss on disposal of the discontinuing operation.
The cash flow and income statement disclosures are presented for the comparative periods as well. However, these prior period amounts are presented in the same manner without the re-measurement arising on classification as held for sale. IFRS 5 describes this as ‘re-presented’ rather than restatement or reclassification.
General corporate overhead costs are not allocated to discontinued operations .
Consolidation procedures are not affected by the fact that a discontinuing operation is presented .
Presentation of the balance sheet
The assets and liabilities of disposal groups (including those that meet the criteria for discontinued operations) are presented separately from other assets and liabilities in the balance sheet. Offsetting assets and liabilities of a disposal group is not permitted. The assets are presented as a single line within current assets; liabilities are presented as a single line within current liabilities. This presentation is required from the point that the held for sale criteria are met. The balance sheet for previous periods cannot be re-presented in this manner unless the criteria were met at the previous period balance sheet date as well .
These single line items include all current and non-current assets and liabilities of the disposal group including those affected by the re-measurement at fair value less cost to sell (e.g. goodwill that may have been partially impaired or other non-current assets), those that are measured at fair value (e.g. derivatives) and those measured in accordance with other IFRS’s (e.g. deferred tax and pensions).
[IFRS5.38]. The major categories of assets and liabilities included within the single line items must be disclosed on the face of the balance sheet or in the notes. This disclosure is not required for newly acquired subsidiaries classified as held for sale from the acquisition date [IFRS5.39].
Items included in equity related to the disposal group or discontinued operation should also be presented separately within equity. This includes items such as CTA, AFS and hedging reserves. It excludes any goodwill that had been previously written off to equity as this is not reinstated under IFRS.
Gains and losses on disposal groups and non-current assets
The gain or loss on re-measurement of a non-current asset or disposal group is presented as part of profit or loss from continuing operations, if the disposal group does not meet the criteria for a discontinued operation.
Additional disclosures
The notes to the financial statements should provide the following disclosures:
a)
a description of the disposal groups and or discontinued operations;
b)
the expected manner and timing of disposal;
c)
the gain or loss recognised for impairments and reversals; and
d)
the segment in which the disposal group is presented, if applicable ) [IFRS5.41].
Transitional provisions
IFRS 5 is mandatory for all annual periods beginning on or after 1 January 2005. Early adoption is encouraged if the valuations and other information (to make the determination of held for sale) were obtained at the time the held for sale criteria were met. Specific disclosure is required if early adoption is selected. The standard is applied prospectively .
First time adopters of IFRS, with a transition date on or after 1 January 2005 apply the requirements of IFRS 5 retrospectively.
