IFRS 5 Summary Notes

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

NON-CURRENT ASSETS HELD FOR SALE

A non-current asset (or disposal group) should be classified as held for sale if its
Definition carrying amount will be recovered principally through a sale transaction rather
than through continuing use.
A group of assets to be disposed of, by sale or otherwise, together as a group in a
single transaction, and liabilities directly associated with those assets that will be
transferred in the transaction. The group includes goodwill acquired in a business
Disposal combination if the group is a cash-generating unit to which goodwill has been
group allocated.

Subsidiaries acquired exclusively with a view to resale are classified as disposal

groups held for sale if they meet the conditions below.
 The asset must be available for immediate sale in its present condition
 Its sale must be highly probable

For the sale to be highly probable, the following must apply:

 Management must be committed to a plan to sell the asset
Conditions  There must be an active program to locate a buyer
 The asset must be marketed for sale at a price that is reasonable in
relation to its current fair value.
 The sale should be expected to take place within one year from the date of
classification.
 It is unlikely that significant changes to the plan will be made.

EXAMPLE 5A
Hyssop is preparing its financial statements for the year ended 31 December 20X7.

Issue 1
On 1 December 20X7, the entity became committed to a plan to sell a surplus office property and
has already found a potential buyer. On 15 December 20X7 a survey was carried out and it was
discovered that the building had dry rot and substantial remedial work would be necessary. The
buyer is prepared to wait for the work to be carried out, but the property will not be sold until the
problem has been rectified. This is not expected to occur until summer 20X8. Can the property be
classified as held for sale”?

Issue 2
A subsidiary entity, B, is for sale at a price of $3 million. There has been some interest by
prospective buyers but no sale as of yet. One buyer has made an offer of $2 million but the
Directors of Hyssop rejected the offer as they were hoping to achieve a price of $3 million. The
Directors have just received advice from their accountants that the fair value of the business is
$2.5 million. They have decided not to reduce the sale price of B at the moment Can the
subsidiary be classified as held for sale?

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IFRS 5 Summary Notes

A ‘non-current asset held for sale (or disposal group)’ is classified under current
assets.
Classification
Asset and liabilities held for sale (in a disposal group) should not be offset and
should be presented separately from other assets and liabilities in SFP.
 At the date of classification, it is measured at lower of its “carrying amount”
and “its fair value less cost to sell”.
Measurement
 The write down (if any) is charged as an expense ‘Impairment loss’.
 No depreciation is to be charged subsequently even if still in use.

EXAMPLE 5B
On 1 January 2001, Mint Co bought a chicken processing machine for $20,000. It has an expected
useful life of 10 years and a nil residual value. On 30 September 2003, Mint Co decides to sell the
machine and starts locating a buyer. The machines are in short supply and can be sold soon. Its
market value on 30 September 2003 is $13,500 and it will cost $500 to uninstall the machine from
Mint Co’s premises to make it available to buyer. The machine has not been sold at the year end
of 31 December 2003.

Required:
At what value the machine be stated in Michelle Co’s statement of financial position at 31
December 2003?

If a sale does not take place within one year, an asset (or disposal group) can still
be classified as held for sale if:
 the delay has been caused by events or circumstances beyond the entity’s
control
 there is sufficient evidence that the entity is still committed to the sale.

If the criteria for ‘held for sale’ are no longer met, then the entity must cease to
Changes to classify the assets or disposal group as held for sale. The assets or disposal
plan of sale group must be measured at the lower of:
 its carrying amount before it was classified as held for sale adjusted for any
depreciation, amortisation or revaluations that would have been recognised
had it not been classified as held for sale
 its recoverable amount at the date of the subsequent decision not to sell.

Any adjustment required is recognised in profit or loss as a gain or loss from

continuing operations.

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IFRS 5 Summary Notes

DISCONTINUED OPERATIONS

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 geographical area of
Definition operations.
 is part of a single co-ordinated plan to dispose of a separate major line of
business or geographical area of operations
 is a subsidiary acquired exclusively with a view to resale.
Discontinued operations are required to be shown separately in order to help
Requirement
users to predict future performance, i.e. based upon continuing operations.
An entity must disclose a single amount on the face of income statement,
comprising the total of:
Presentation
 The post-tax profit or loss of discontinued operations
 The post-tax gain or loss on related assets disposed or held for sale.
A detailed analysis (revenue, expenses, etc) of above single amount must be
Analysis
presented either in notes or on the face of income statement.

EXAMPLE 5C
PK Limited had sugar and textile businesses. However, half way through the year ended 31
December 2010, the textile business was closed and the assets sold off, incurring losses on the
disposal on non-current assets of $76,000 and redundancy cost of $37,000. The directors
reorganized the continuing sugar business at a cost of $98,000 and directors consider this an
exceptional item. In addition to these costs, the following operating results have been summarized:
Sugar Textile
$ $
Revenue 650,000 320,000
Cost of sales 320,000 150,000
Distribution 60,000 90,000
Administration 120,000 110,000

Other information (related to continuing operations only) is as follows:

$
Finance cost 17,000
Tax 31,000

Required:
Draft the income statement for the year ended 31 December 2010.

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IFRS 5 Summary Notes

ANSWER 5A
Issue 1
IFRS 5 states that in order to be classified as ‘held for sale’ the property should be available for
immediate sale in its present condition. The property will not be sold until the work has been
carried out; this demonstrates that the facility is not available for immediate sale. Therefore the
property cannot be classified as ‘held for sale’.

Issue 2
The subsidiary B does not meet the criteria for classification as ‘held for sale’, because while
actions to locate a buyer are in place, the subsidiary is not for sale at a price that is reasonable
compared with its fair value. The fair value of the subsidiary is $2.5 million, but it is up for sale for
$3 million. It cannot be classified as held for sale’ until the sale price is reduced.

ANSWER 5B

Carrying value at 30 September 2003 $

Cost at 1 January 2001 20,000
Depreciation 2001 $20,000 / 10 years (2,000)
Depreciation 2002 $20,000 / 10 years (2,000)
Depreciation 2003 $20,000 / 10 years x 9/12 months (1,500)
14,500

Fair value less cost to sell = $13,500 - $500 = $13,000

The machine qualifies as held for sale on 30 September 2003, so should be stated at lower of
above two values i.e. $13,000

The impairment loss of $1,500 (i.e. $14,500 - $13,000) shall be recognised.

The machine will no longer be depreciated.

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IFRS 5 Summary Notes

ANSWER 5C
PK Limited
Income statement
For the year ended 31 December 2010
$
Revenue 650,000
Cost of sales (320,000)
Gross profit 330,000
Administrative expenses (120,000)
Distribution expenses (60,000)
Exceptional items (reorganization) (98,000)
Operating profit 52,000
Finance cost (17,000)
Profit before tax 35,000
Taxation (31,000)
Profit after tax 4,000
Loss on discontinued operations W1 (143,000)
Loss for the period (139,000)

W1 Analysis of loss on discontinued operations $

Revenue 320,000
Cost of sales (150,000)
Gross profit 170,000
Administrative expenses (110,000)
Distribution expenses (90,000)
Operating loss (30,000)
Loss on disposal (76,000)
Redundancy costs (37,000)
Loss on discontinued operations (143,000)

Dated: 07 November 2016

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