Assessing if a disposal meets held for sale accounting? Tune in to hear PwC’s Joe Niedringhaus discuss the related criteria and share his perspectives on a few of the more judgmental areas.
Hello I'm Joe Neidringhaus, a senior manager in the national office.
Today I want to share some perspectives on disposals, and specifically, the held for sale accounting model. Determining if held for sale accounting has been met is critical due to the pervasive nature of the financial statement impacts.
There are six criteria to achieve held for sale accounting. Meeting all of these criteria can be difficult and the assessment of each takes a significant amount of judgement. Let’s talk through some additional considerations on a few of them.
On the first item, management commits to a plan, there needs to be specificity to the plan. That means the assets need to be identified, the actions to be taken are identified, and there is an expected date of completion. Also, management must have the authority to commit to the plan. This can be impacted by various scenarios, such a company policy for Board approvals. Also, there may be situations where shareholder approvals or the approval of a governmental agency or lender may impact the ability of management to commit to the plan.
The second criteria, available for sale in its present condition, means the asset is ready to be sold and transferred with only usual and customary terms and conditions. An example where this may not be the case is where a manufacturing facility is being sold, but a backlog of orders exists that is not part of the transaction. If the company must retain the facility until the backlog is complete, the available for immediate sale criterion would not be met.
For the third criteria, an active program to sell may include marketing efforts, and other work streams such as legal or financial activities.
The fourth criteria - probable to occur within one year. While one year is the benchmark, there are certain exceptions, such as a firm purchase commitment where the buyer imposes conditions that force the transfer to extend beyond one year. When assessing whether a transaction is probable a company may consider its past experience with sales, the reasonableness of the sales price and other market factors.
Ensuring that the sales price is reasonable is a relatively straightforward principle, however assessing this will often require judgment. Similarly assessing whether it is unlikely there will be changes to the plan may requirement judgment.
Care should be taken to ensure that the assessments made reflect a balanced perspective and critical assumptions are appropriately vetted.
If held for sale treatment is appropriate, the asset or disposal group is no longer amortized or depreciated.
The asset or disposal group should be measured at the lower of its carrying amount or fair value less cost to sell. An impairment loss is recognized for any initial or subsequent write-down of the asset or disposal group to its fair value, less cost to sell. Any subsequent increase in the asset’s or disposal group’s fair value, less cost to sell, should be recognized, but not in excess of the original carrying amount. Assets held-for-sale are an exception to the fair value measurement principle used in most acquisition accounting, because they are measured at fair value less costs to sell.
A few related points to consider when you are evaluating held for sale.
First, I want to highlight the interaction of held for sale accounting with the held for use model. Many times, management might be exploring strategic alternatives for long-lived assets, including continuing to use the assets in a modified manner, abandoning the assets, or disposing of the assets through sale. In this situation, the assets should be classified as held and used for purposes of impairment testing until the entity commits to a plan and meets all the held-for-sale requirements. This is a critical determination because the ordering of impairment is different between held and used and held for sale. And can yield significantly different P&L and presentation results.
I want to highlight that while held for sale accounting is a prerequisite for qualifying for discontinued operations, it is not an automatic conclusion. You may have held for sale accounting but not be a discontinued operation.
The interaction with SEC 8-K requirements is an area where guidance is separate and distinct. So you could have the scenario where an 8-K is required when other guidance has not been tripped. It can also work the other way. So you could have a discontinued operation, but no 8-K requirement; or not meet discontinued operation yet still need an 8-K.
Careful assessment of held for sale criteria and the interaction with other standards and disclosures is key to preventing any last minute surprises.