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Non-Current Asset Held For Sale Notes (Final)

Intermediate Accounting 2 (Pontifical and Royal University of Santo Tomas, The Catholic
University of the Philippines)

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Non-Current Assets Held For Sale and Discontinued Operations (IFRS 5)

A non-current asset or disposal group that is to be classified as “held for sale” if the
carrying amount of the asset is to be principally recovered through a sale
transaction (not through continuing use of the asset)
When a non-current asset or disposal group is reclassified as held for sale, it becomes
a current asset.
Depreciation and Amortization of the asset ceases upon reclassification of the Non-
Current Asset/Disposal Group as “held for sale” at reclassification date.
(This is because depreciation and amortization is the allocation of the carrying amount
of the asset over the period of expected benefits from continuing use of the asset. When
we reclassify non-current assets as “held for sale”, we no longer recover the carrying
amount of the asset from continuing use, but through its sale).

Two conditions to classify a non-current asset or disposal group as

held for sale:
1.) The Non-Current Asset or disposal group must be available for immediate sale in
its present condition subject only to terms that are usual and customary for sale
of such assets or disposal group.
Note: This means the asset should be in a current condition in which it can be “sold
as seen” by a buyer.
2.) The sale must be highly probable
To be highly probable, the entity should have:
 Management be committed to a plan on selling the asset
 An active program on locating a buyer and complete the plan
 The sale be a completed sale within one year from the date of reclassification
of asset to a “non-current asset held for sale”
Note: If the sale is not completed within one year due to circumstances and
events beyond the entity’s control, the asset or disposal group is still classified as
“Non-current asset held for sale”
 The asset or disposal group actively marketed for sale at a sale price in
relation to the fair value
 Actions required to complete the plan indicate that it is unlikely that the plan
will be significantly changed or withdrawn

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Note: When the above criteria are met after the reporting period,, but
prior the issuance of financial statements, the entity shall not classify
the asset as held for sale. But a disclosure relating to the asset/disposal group
that it has met the criteria after year-end date, shall be disclosed.

Initial Measurement of Non-Current Asset/Disposal Group

Held For Sale

-An entity reclassifying a non-current asset or disposal group as “held for sale” will be
initially measured at the lower of: 1.) Its Carrying amount in its Previous
Classification; 2.) Fair Value less Costs to Sell
Note: Costs to Sell is accounted for at its present value when the sale of Non-Current
Asset held for Sale is more than one year. Annual amortization of Costs to Sell is
recognized as a finance cost.

Costs to Sell does not include income tax expense and interest
expense

-Initial and subsequent recognition of a Non-Current Asset/Disposal group reclassified is

divided into two methods. 1.) Cost Model initial recognition and; 2.) Revaluation
Model initial recognition

Cost Model Initial Recognition

-This is used when the non-current asset/disposal group in its previous
classification is accounted for using the cost model.
-We simply apply the general rule of measuring the non-current asset at the
lower of carrying amount in its previous classification and the Fair Value
less costs to sell.
Note: If at initial recognition of a Non-Current Asset/Disposal group held for
sale, we used the “Fair Value less Cost to Sell” as valuation, the reduction
from updated carrying amount at prior classification, to Fair Value less cost
to sell is recognized as, “impairment loss” to appear in profit or loss
statement and credited/deducted from the “Non-Current Asset held For
sale” account

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At subsequent recognition, any decrease from the non-current asset held

for sale’s initial measurement up to the Fair Value less Cost to Sell at year-
end, is debited to “Impairment Loss” to appear in profit or loss statement
and credited to the “Non-Current Asset held for Sale” account

Revaluation Model Initial Recognition

-This is used when the non-current asset/disposal group in its previous
classification is accounted for using the revaluation model.
-Prior to reclassification, we update the fair value of the non-current
asset/disposal group at reclassification date. The rules of IAS 16 apply.
Dr. PPE/Intangible Asset OR Dr. Rev. Loss/Rev. Surplus
Cr. Rev. Surplus Cr. PPE/Intangible Asset

Note: Any increase from Carrying Amount to Fair Value is credited to

“Revaluation Surplus”. Any decrease from Carrying Amount to Fair Value is
debited to “Revaluation Surplus” to the extent of the balance and debited to
“Revaluation Loss” (to appear in profit or loss statement)
Afterwards the asset is reclassified as “held for sale”. Any cost to sell
recognized at reclassification date is treated and debited as an
“impairment loss”, and crediting the “Non-current Asset held for Sale”
account.
Dr. NCA held for Sale
Accum Dep./Accum Amort.
Cr. PPE/Intangible Asset
Dr. Impairment Loss (Costs to Sell)
Cr. NCA held For Sale (Costs to Sell)

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Impairment Loss Upon Initial Recognition

-An asset recently reclassified into a “Non-Current Asset Held For Sale” will
recognize impairment loss in its initial recognition if the “Fair Value Less
Cost of Disposal” Valuation is used as the lower between Carrying Amount
at Previous Classification Prior Reclassification, and The Fair Value Less
Cost of Disposal.
But if the asset reclassified is a disposal group, impairment losses will be
debited, and the corresponding credit is the “NCA Asset Held For Sale
Account”.
Debit: NCA Held for Sale
Accum Depreciation
Acumm Amortization
Credit: PPE
Intangible Asset
Debit: Impairment Loss (At the amount of decrease from Updated Carrying
Amount at previous classification, to FV Less Cost to Sell)
Credit. NCA Held For Sale

Subsequent Measurement of a Non-Current Asset/Disposal

Group Held for Sale

-The NCA/Disposal Group Held for Sale is subsequently measured at rhe

lower of: 1.) Carrying Amount of the NCA before reclassification to
NCA held for sale and ;Fair Value less Cost to Sell.

Note 2: The Carrying amount definition from initial and subsequent

recognition of a Non-Current Asset pertains to the updated carrying
amount at previous classification of the asset. (When it was still
classified as non-current asset such as PPE, Land, Intangible Asset prior
reclassification to Non-Current Asset held for sale)

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As a general rule, before reclassifying an asset or group of assets to NCA

Held For Sale, update first their carrying amounts on the day of
reclassification in the corresponding accounting standards applicable to
them. (Any depreciation, amortization or impairment losses incurred shall
be recognized when the asset incurs them before reclassifying the asset as
NCA Held For Sale). The result becomes the updated carrying amount in
prior classification, that is used as comparative basis with Fair Value
Less Cost to Sell, for valuing the initial recognition of a NCA Asset Held
For Sale.

Recovery of Impairment Loss

-During subsequent recognition of a “Non-Current Asset held for Sale”

account, when the Fair Value less cost of disposal at year-end date
increases, the increase is credited as a “Recovery of Previously
Recognized Impairment Loss”.
If there is no impairment loss recognized (meaning the NCA held for
Sale is valued at its carrying amount prior reclassification), no increase in
the fair value of the asset shall be recognized.

Note: The Increase or Recovery of Impairment Loss is only up to the extent

of the cumulative balance of impairment loss recognized on the asset in its
new classification. (Impairment losses incurred in its previous classification,
such as when it was a PPE, is ignored for purposes of computing increases
of FV Less Cost to Sell when the asset is a “NCA Held For Sale”.)

Impairment Loss at Subsequent Recognition

-If the Fair Value Less Cost to Sell of the Asset becomes lower at year-end date, an
“impairment loss” is recognized in profit or loss statement for the year. The Non-
Current Asset held for Sale account is credited at the amount of impairment loss
recognized.

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Non-Current Asset no Longer Classified as Held for Sale

-Circumstances may arise leading to the non-current asset to no longer be
classified as held for sale such as: 1.) Decision of continuing use of the
asset, and; 2.)When the asset no longer meets the criteria to be classified
as held for sale.
-In such cases PFRS 5 provides that the entity shall measure the non-
current asset that ceases to be classified as held for sale at the lower of:
1.) Carrying Amount before the asset was classified as held for sale,
adjusted for any depreciation, amortization, and revaluation (for assets
previously held at revaluation model) up to the date where the entity
ceases the asset to be classified as held for sale.
*For simplicity, this carrying amount pertains to the carrying amount of the
asset on the basis that the asset had never been classified as held for sale,
at present date where the entity ceases the asset to be classified as held
for sale.
2.) Recoverable Amount (This is the higher between Value in Use and
Fair Value less Costs to Sell),

Increase and Decrease in Valuation from Non-Current Asset held For

Sale to its Previous Classification
-When the asset classified as “held for sale” is reclassified to its previous
classification, the carrying amount of the “NCA held for sale” is
increased/decreased towards its new measurement upon reclassification to
its old classification. This has two treatments.

Cost Model in Prior Classification

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-When the asset’s previous classification uses the cost model, any
decrease from its current balance as a “NCA held for sale” towards its new
measurement (previous classification) upon reclassification is debited to
“impairment loss” recognized in profit or loss and credited to the asset
account in its previous classification.
Any increase is credited to a “Recovery of Impairment Loss” account
recognized in profit or loss.
Ex. Dr. Impairment Loss; Cr. Acumm Depreciation.
Dr. Acumm Dep;Cr. Recovery of Impairment Loss

*Note: From the reclassification of NCA Held For sale towards its previous
classification, the balance of NCA Held For Sale can be increased up to the
extent of the cumulative impairment loss balance recognized when the
asset was a PPE, plus, the impairment loss balance recognized when it
was a Non-Current Asset Held For Sale. (This does not occur much often in
Cost Model. It occurs more frequently in Revaluation Model).
Example:
On Jan 1, 2019, A PPE had a cost of P3.5M and Accumulated Depreciation
of P1,000,000. It has a residual value of P300,000. It has a remaining
useful life of 5 years and had a balance of P200,000 in its impairment loss.
On this date the asset was reclassified to NCA Held For Sale. FV Less
Cost to Sell was P 2,000,000.
On Jan 1, 2020, the entity decided to continue the use of the asset. Its
Recoverable Amount on this date was P2,200,000.

Jan 1, 2019
Dr. NCA Held For Sale 2,000,000
Impairment Loss 500,000
Accum Dep. 1,000,000
Cr. PPE 3,500,000

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Jan 1, 2020
Cost 3,500,000
Accum Dep 1,440,000
C/A 2,060,000
(Had the asset not been reclassified as NCA)

*The Carrying Amount had the asset not been reclassified to NCA Held For
Sale is lower than the Recoverable Amount. Therefore, at reclassification of
the NCA Held for Sale asset to its previous classification of PPE, its
balance will now be P2,060,000 from P2,000,000.

Dr. PPE 3,500,000

Cr. Accum Dep 1,440,000

Recovery of Impairment Loss 60,000

Example #2
Using the same given data above, assume that the Carrying Amount of the
Asset had there been no reclassification to NCA Held For Sale was
P5,000,000 and the Recoverable Amount is P5,100,000;

(Impairment Loss balance while Asset is NCA Held For Sale + Impairment
Loss Balance while Asset is a PPE = Maximum Amount of Recovery of
Impairment Loss of the Asset reclassified back to its original classification)
Ordinarily we should increase the P2,000,000 balance of NCA Held for
Sale to P5,000,000 as its measurement as a PPE had there been no
reclassification to “NCA held for Sale”.

P2,000,000 P 5,000,000 = P3M Increase

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BUT, we need to determine the total cumulative impairment loss balance

incurred when the Asset was still a PPE, plus, the impairment loss balance
when the asset was a Non-Current Asset Held For Sale.

P200,000 (impairment loss as a PPE) + P500,000 (Impairment loss as a

NCA Held For Sale)
= P700,000 maximum amount of impairment
loss
Recovery
*This means we can only increase the balance of P2M NCA Held For sale
by P700,000 at most EVEN if the Carrying Amount of the PPE had there
been no reclassification to NCA Held For Sale, is P5,000,000, as the
standard mentions.

Debit: Property Plant and Equipment 2,700,000

Cr. NCA Held For Sale 2,000,000
Recovery of Impairment Loss 700,000

Revaluation Model in Prior Classification

-If the previous classification in the reclassification from “non-current asset
held for sale” to new classification (previous classification) uses the
revaluation model, any increase is credited to a “Revaluation Surplus”
account recognized in OCI.
Any decrease is debited to “Revaluation Surplus” account to the extent of
balance, and any remaining decrease is debited to “Revaluation loss” to
appear in profit or loss. (Provisions of IAS 16 or IAS 38 Intangible Asset’s
Revaluation Model applies).
Ex.
Dr. Equipment ‘ Cr. Revaluation Surplus
Dr. Revaluation Surplus/Revaluation Loss; Cr. Equipment

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Note: After an asset previously held for sale is reclassified in its previous
classification, depreciation and amortization resume prospectively.
(depreciate and amortize in the future periods) Any revaluation done also
updates the carrying amount of the asset, less subsequent
depreciations/amortizations.

Note: The amount of recovery of impairment loss from reclassifying the

NCA Held For sale towards its previous classification is the cumulative
impairment loss from when it was a PPE, plus the impairment loss it
incurred when it was a NCA Held For Sale.

Presentation of Asset Classified as Held for Sale

-A non-current asset held for sale shall be presented separately as a current asset in
the statement of financial position.
-A disposal group held for sale shall have the assets and liabilities of the group
presented separately in the statement of financial position and cannot be offset as a
single account.
In other words, the assets of the disposal group shall be classified as, “Non-current
assets classified as held for sale” presented separately under current assets. The
liabilities of the disposal group shall be classified as, “Liabilities directly associated with
non-current assets classified as held for sale” presented separately under current
liabilities.

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Non-Current Assets Held For Distribution

-These are Non-Current Assets that are to be distributed to stockholders as dividends. It

is a Property Dividend.
-It is initially and subsequently measured at the lower between: 1.) Updated Carrying
Amount in Asset’s Prior Classification; 2.) Fair Value Less Cost to Sell
-It also incurs “impairment Loss” at initial recognition of reclassification, if the Fair
Value less Cost to Sell is less than the Carrying Amount of the Asset in its Prior
Classification.

Initial Recognition

Debit: Non-Current Asset Held for Distribution

(At lower of C/A and FV Less Cost to Sell)
Impairment Loss
Accumulated Depreciation
Credit: PPE (At Cost)

Debit: Retained Earnings (At Fair Value) (without deducting cost to sell)
Credit: Property Dividends Payable (At Fair Value) (without deducting cost to sell)

-What is different here is that Retained Earnings account is debited, and Property
Dividends Payable account is credited, at the Fair Value of the Asset at initial
recognition as a NCA held for Sale. The Property Dividends Payable Account is
continuously updated at year-end up to the actual date of distribution at Fair Value,
- On the actual date of distribution, the NCA Held For Sale balance is no longer
adjusted to its Fair Value Less Cost to Sell on the date of distribution. Instead, it
retains its last year end’s balance, when it is to be distributed.
-On the Actual Date of Distribution the journal entry is:

Dr. Retained Earnings(If FV increased) OR Dr. Prop. Div. Payable (FV decrease)
Cr. Property Dividends Payable Cr. Retained Earnings

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(Derecognition of NCA Held For Distribution also involves simultaneous settlement of

the Dividend Liability)
Dr. Property Dividends Payable xx (At Fair Value)
Cr. Non-Current Assets Held For Distribution xx
(At Prior year’s FV Less Cost to sell)

Gain on Distribution (Balancing Figure) xx

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