Held for Sale Accounting: What It Is and How It Works

Held for sale accounting is a specific treatment for long-lived assets, such as buildings or equipment, that a company decides to sell instead of continuing to use in its operations. The purpose of this accounting method is to provide investors and creditors with more relevant information about the asset’s value and its impending disposal. When an asset is reclassified as held for sale, its accounting treatment changes. It provides a clearer picture of the asset’s expected economic benefit, which is now tied to its sale price rather than its operational use.

Criteria for Classification

For a long-lived asset to be classified as held for sale, it must meet a strict set of criteria outlined in accounting standards, such as Accounting Standards Codification 360. These rules ensure the classification is used only when the sale is genuinely probable. The primary conditions are:

• Management must be committed to a formal plan to sell the asset.
• The asset must be available for immediate sale in its present condition, subject only to terms that are usual and customary for such sales.
• An active program to locate a buyer must be underway, which involves marketing the asset at a reasonable price.
• The sale is probable and expected to qualify as a completed sale within one year.
• It is unlikely that significant changes will be made to the plan or that the plan will be withdrawn.

Measurement and Impairment

Once an asset is classified as held for sale, it is measured at the lower of its carrying amount or its fair value less costs to sell. The carrying amount is the asset’s value on the books, which is its original cost minus any accumulated depreciation. Fair value is the price that would be received to sell the asset in an orderly transaction. Costs to sell are the direct incremental costs required to transact the sale, such as broker commissions, legal fees, and transfer taxes.

A company stops recording depreciation on an asset once the classification is made. If the fair value less these selling costs is lower than the asset’s current carrying amount, the company must recognize an impairment loss for the difference, which is reported in the income statement.

For example, consider a piece of equipment with a carrying amount of $50,000. The company determines its fair value is $48,000 and the estimated costs to sell are $3,000. The fair value less costs to sell is $45,000. Since this is lower than the $50,000 carrying amount, the company would write down the asset’s value to $45,000 and recognize a $5,000 impairment loss.

Financial Statement Presentation and Disclosures

On the balance sheet, held-for-sale assets are segregated from assets that are held and used in operations. They are presented as a single line item, such as “Assets held for sale,” within the current assets section, reflecting the expectation of a sale within one year. If a group of assets and associated liabilities are being disposed of together, the liabilities are also presented separately on the balance sheet. They are not netted against the assets but are shown as a distinct line item, often titled “Liabilities associated with assets held for sale.”

In the notes to the financial statements, companies must provide detailed disclosures. These include a description of the facts and circumstances leading to the expected sale, the expected manner and timing of the disposal, and the carrying amounts of the major classes of assets and liabilities included in the disposal group. If the disposal group represents a strategic shift that has a major effect on an entity’s operations, its results may be reported as discontinued operations on the income statement.

Changes in the Plan to Sell

A company’s plans can change, and an asset previously classified as held for sale might be reclassified back to being held and used if the criteria are no longer met. The asset must be remeasured at the lower of two values. The first value is its carrying amount before it was classified as held for sale, adjusted for any depreciation that would have been recorded during the period it was held for sale. The second value is its fair value at the date of the subsequent decision not to sell. This rule prevents a company from writing up an asset to a higher fair value simply because the plan to sell was abandoned.

Any adjustment required to bring the asset to its new carrying amount is recorded in the income statement from continuing operations. For instance, if an asset’s original carrying amount was $100,000 and it would have been depreciated by $10,000 while held for sale, its adjusted carrying amount would be $90,000. If its fair value on the date of reclassification is $85,000, the asset would be recorded at $85,000, the lower of the two amounts. The company would then resume recording depreciation on the asset going forward.