IFRS 5-2: Accounting for Assets Held for Sale

International Financial Reporting Standard 5, or IFRS 5, provides specific guidance for the accounting and reporting of non-current assets that a company intends to sell. While some may search for this topic under the name “IFRS 5-2,” the official title is simply IFRS 5. The regulation dictates the accounting for assets classified as held for sale and governs how companies must present and disclose operations they have decided to discontinue. This framework ensures financial statements clearly distinguish between a company’s ongoing activities and the assets it is phasing out.

Criteria for Held for Sale Classification

An asset cannot be classified as held for sale based on a simple intention to sell. IFRS 5 establishes strict criteria to ensure the plan is concrete and the sale is imminent. Senior management must be formally committed to a plan to sell the asset, which involves a definitive action plan to complete the disposal.

The asset must be available for immediate sale in its present condition, subject only to terms that are usual and customary for such sales. This means an asset cannot be classified as held for sale if it requires significant modifications before it can be transferred. An active program to locate a buyer must also have been initiated, which involves marketing the asset at a price that is reasonable in relation to its current fair value.

The sale must be highly probable, with completion expected within one year from the date of classification. For example, if a company decides to sell a factory, it must approve the sale, begin searching for a buyer, and have the factory in a ready-to-sell state. If the entire process is expected to conclude within twelve months, the factory can be classified as held for sale.

These same principles apply to a “disposal group,” which is a collection of assets and potentially some associated liabilities to be sold together in a single transaction. The criteria for classification as held for sale would then apply to the group as a whole.

Measurement and Presentation of Assets Held for Sale

The core measurement principle under IFRS 5 is that these assets are valued at the lower of their carrying amount and their fair value less costs to sell. The “carrying amount” is the asset’s value as recorded on the company’s books, which is its original cost minus all accumulated depreciation. “Fair value” is the price that would be received to sell the asset in an orderly transaction between market participants.

“Costs to sell” are the direct, incremental costs associated with the disposal, such as legal fees and brokerage commissions. If the fair value less costs to sell is lower than the carrying amount, the company must recognize an impairment loss for the difference, immediately reducing the asset’s value.

A notable consequence of this classification is that the company must cease depreciating or amortizing the asset. Since the asset’s value is expected to be recovered through sale rather than through its ongoing use, continuing to charge depreciation is no longer appropriate. Any interest and other expenses attributable to liabilities associated with a disposal group, however, continue to be recognized.

For presentation, IFRS 5 mandates that assets held for sale be shown separately from other assets on the statement of financial position. Similarly, any liabilities that are part of a disposal group must be presented separately from other liabilities.

Accounting for Discontinued Operations

A discontinued operation under IFRS 5 represents a more significant strategic shift than the sale of a single asset. A discontinued operation is a component of an entity that has either been disposed of or is classified as held for sale and represents a separate major line of business or a significant geographical area of operations. It could also be part of a single, coordinated plan to dispose of such a business line or area.

The accounting for a discontinued operation is designed to provide clarity to investors about the performance of the company’s core, ongoing business. The financial results of the discontinued operation must be separated from the results of continuing operations and presented as a single amount on the income statement.

This single line item represents the post-tax profit or loss of the discontinued operation for the period. It also includes any post-tax gain or loss recognized from either the measurement of the assets to fair value less costs to sell or their ultimate disposal. The standard prohibits classifying an operation as discontinued retroactively if the criteria are met after the reporting period ends.

Required Disclosures

IFRS 5 mandates detailed disclosures in the notes to the financial statements to provide users with a comprehensive understanding of assets held for sale and discontinued operations. These disclosures offer context regarding the nature of the assets being sold and the financial impact of the decision.

For assets and disposal groups classified as held for sale, a company must provide a description of the non-current asset or disposal group. It must also disclose the facts and circumstances surrounding the sale, including the expected manner and timing of the disposal. If an impairment loss was recognized, the amount of that loss and the level of the fair value hierarchy used to measure fair value must be reported.

For discontinued operations, the disclosure requirements are more extensive. A company must provide a detailed analysis of the single amount presented on the income statement, which includes the revenue, expenses, and pre-tax profit or loss of the discontinued operation. It also requires separate disclosure of any income tax expense related to these results.

Furthermore, the net cash flows attributable to the operating, investing, and financing activities of the discontinued operation must be disclosed. This can be presented either in the notes or directly on the statement of cash flows.