ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 1

FINANCIAL ACCOUNTING & REPORTING C. Uberita  G. Macariola  J. Binaluyo

FAR-4202: DISCONTINUED OPERATION &

NON-CURRENT ASSETS HELD FOR SALE
Discontinued operation – PFRS 5 defines a discontinued operation as “a component of an entity that either has
been disposed of or is classified as held for sale and:
a. represents a major line of business or geographical area of operation;
b. is part of a single coordinated plan to dispose of a separate major line of business or geographical area of
operations; or
c. is a subsidiary acquired exclusively with a view to resale.

Disclosure of Discontinued Operation:

a. a single amount in the statement of comprehensive income comprising the total of:
1. the post-tax profit or loss of discontinued operation; and
2. the post-tax gain or loss recognized on the measurement to fair value less cost to sell, or the disposal of
assets or disposal group(s) constituting the discontinued operation.
b. an analysis of the single amount in (a) into:
1. the revenue, expenses and pre-tax profit or loss of discontinued operations;
2. the related income tax expense as required by PAS 12
3. the gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the
assets or disposal group(s) constituting the discontinued operation; and
4. the related income tax expense as required by PAS 12

Non-current Assets Held for Sale:

Classification as Held for Sale – PFRS 5 prescribed that “an entity shall classify a non-current asset (or disposal
group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather
than through continuing use.

A Non-current Asset Held for Sale may be a single asset, such as a landed property held for sale, or an equity
investment held for sale. Non-current assets held for sale may constitute a disposal group. PFRS 5 defines
a disposal group as “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 business combination, if the group is a cash-generating unit to which
goodwill has been allocated in accordance with the requirements of PAS 36 impairment of assets, or if it is an
operation within such a cash generating unit”. For example, a planned divestment of a subsidiary or a
geographical segment would qualify as a disposal group. Similarly, a planned disposal of a subsidiary or an
operation within the subsidiary, such as its manufacturing plant, would qualify as a disposal group.

Criteria for Classification: - to meet the classification requirement, the asset (or the disposal group) must be
available for immediate sale in its present condition, subject only to terms that are usual and customary
for sales of such assets (or disposal group), and the sale must be highly probable. Highly probable is
defined in the standard as “significantly more likely than probable”.

For sale to be highly probable, the appropriate level of management must be committed to a plan to sell
the asset (or disposal group), and an active program to locate a buyer and complete the plan must have
been initiated. For major divestment decision, management’s commitment would normally require approval
of the plan to dispose by the Board of Directors, or an equivalent governing body of the entity. The asset (or
disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current
fair value. The sale shall be expected to qualify for recognition as completed sale within one year from the
date of classification, except for circumstances beyond the control of management and actions required to
complete the plan shall indicate that it is unlikely that significant changes to the plan will be made or that the
plan will be withdrawn.

Events or circumstances may extend the period to complete the sale beyond one year. An extension of the
period required to complete a sale does not preclude an asset (or disposal group) from being classified as
held for sale, if the delay is caused by events or circumstances beyond the entity’s control, there is sufficient
evidence that the entity remains committed to its plan to sell the asset (or disposal group).

Measurement of Non-current Assets (or Disposal Groups) Held for Sale

a) An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its
carrying amount and fair value less cost to sell”. The carrying amount recorded for the asset (or disposal
group) in the statement of financial position at the date of classification, as held for sale. The fair value is
“the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length
transaction.
b) An entity shall measure a non-current asset (of disposal group) classified as held for distribution to owners
at the lower of its carrying amount and fair value less costs to distribute.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4202
Week 1: DISCONTINUED OPERATION & NON-CURRENT ASSETS HELD FOR SALE

c) If a newly acquired asset (or disposal group) meets the criteria to be classified as held for sale being measured
on initial recognition at the lower of its carrying amount had it bot been so classified and fair value less cost
to sell. Hence if the asset (of disposal group) is acquired as part of a business combination, it shall be
measured at fair value less cost to sell.
d) When the sale is expected to occur beyond one year, the entity shall measure the cost to sell at their present
value. Any increase in the present value of the costs to sell that arises from the passage of time shall be
presented in profit or loss as a financing cost.
e) Immediately before the initial classification of the asset (or disposal group) as held for sale, the carrying
amounts of the asset (or all the assets and liabilities in the group) shall be measured in accordance with
applicable IFRSs.
f) On subsequent remeasurement of a disposal group, the carrying amounts of any assets and liabilities that
are not within the scope of the measurement requirements of the IFRS, but are included in a disposal group
classified as held for sale, shall be remeasured in accordance with applicable in accordance with applicable
IFRSs before the fair value less costs to sell of the disposal group is remeasured.

Recognition of impairment losses and Reversals:

a) an entity shall recognize an impairment loss for any initial or subsequent write-down of the asset (or disposal
group) to fair value less costs to sell.
b) An entity shall recognize a gain for any subsequent increase in fair value less cost to sell of an asset, but not
in excess of the cumulative impairment loss that has been recognized

Changes to a Plan of Sale or to a Plan of Distribution to Owners - it is possible that an entity may change
its plan to sell a non-current asset or disposal group after it has been classified as held for sale. If a change
in plan occurs, it is most likely to be caused by events or circumstances beyond the control of the entity rather
than by its own revocation. A change in plan to sell for the may also occur when the criteria for classification
are no longer met.

If the entity has classified an asset (or disposal group) as held for sale or held for distribution to owners, but
the criteria for classification are no longer met, the entity shall cease to classify the asset (or disposal group)
as held for sale or held for distribution to owners

IFRS 5 clarify that if an entity reclassifies an asset (or disposal group) directly from being held for sale to
being held for distribution to owners, or directly from being held for distribution to owners to being held for
sale, then the change in classification is considered a continuation or the original plan of disposal.

When the entity ceases the classification of a non-current asset (or disposal group) as held for sale or as held
for distribution to owners, (or ceases to be included in a disposal group classified as held for sale or held for
distribution to owners), it shall measure the asset or disposal group at the lower of:
a. Its carrying amount before the asset (or disposal group) was classified as held for sale or as held for
distribution to owners, adjusted for any depreciation, amortization or revaluations that would have
recognized had the asset (or disposal group) not been classified as held for sale or as held for distribution
to owners, and
b. Its recoverable amount at the date of the subsequent decision not to sell or distribute.

The entity shall include any required adjustment to the carrying amount of a non-current asset that ceases
to be classified as held for sale or as held for distribution to owners in profit or loss from continuing operations
in the period in which the criteria for classification are no longer met. The entity shall present the same
caption in the statement of comprehensive income used to present a gain or loss, if any, recognized in profit
or loss from continuing operations.

If an entity removes an individual asset or liability from a disposal group classified as held for sale or as held
for distribution to owners, the remaining assets and liabilities of the disposal group to be sold or to be
distributed to owners shall continue to be measured as a group only if the group meets the criteria for
classification. Otherwise, the remaining non-current assets of the group that individually meets the criteria
to be classified as held for sale or as held for distribution to owners, shall be measured individually at the
lower of their carrying amounts and fair values less cost to sell at that date. Any non-current asset that do
not meet the criteria shall cease to be classified as held for sale or as held for distribution to owners and
measured at lower of its carrying amount that would have been determined, had it not been classified as held
for sale or as held for distribution to owners and its recoverable amount.

Presentation of Non-Current Asset or Disposal Group Held for Sale – an entity shall present a non-
current asset classified as held for sale and the assets of the disposal group classified as held for sale,
separately from other assets in the statement of financial position. The liabilities of a disposal group classified
as held for sale shall be presented separately from other liabilities in the statement of financial position. Those
assets and liabilities shall not be offset and presented as a single amount. The major classes of assets and
liabilities classified as held for sale shall be separately disclosed either on the face of the statement of financial
position or in the notes. An entity shall present separately any cumulative income or expense recognized
directly in equity relating to a non-current asset (or disposal group) classified as held for sale.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4202
Week 1: DISCONTINUED OPERATION & NON-CURRENT ASSETS HELD FOR SALE

1. On January 1, 2020, Power Company approved a plan to dispose of a business segment. It is expected that
the sale will occur on April 30, 2021. On December 31, 2020, the carrying value of net assets of the segment
was P4,000,000 and the net recoverable amount was P3,600,000. During 2020, the company paid employees
severance and relocation costs of P200,000 as a direct result of the discontinuing operations. The revenues
and expenses of the discontinuing segment during 2020 were: Income tax rate is 35%.

Revenues Expenses
January 1 to December 31 ……………………… 5,800,000 4,400,000

How much will be reported as Discontinued Operation for the year 2020?
a. P520,000 c. P800,000
b. P780,000 d. P1,300,000

2. On September 1, 2020, Polo Company approved a formal plan to sell a business segment. The sale will occur
in March 2021. The segment reported revenues and expenses of P3,000,000 and P1,600,000, respectively
during 2020. On December 31, 2021, the carrying value of the segment was P8,000,000 and the recoverable
value was P7,700,000. During the year 2021, the segment has yet to be disposed of. Throughout the year
2021, the segment reported revenues of P1,300,000 and expenses of P900,000. The recoverable value of
the segment on December 31, 2021 is P8,400,000. Income tax rate is 35%.

How much will be reported as Discontinued Operation for the year 2021?
a. P260,000 c. P520,000
b. P455,000 d. P845,000

3. Stamp Holding Company has several operating divisions. On October 1, 2019, management decided to sell
one of its division that qualifies as a separate component according to IFRS 5. The division was sold on
December 18, 2019 for a net selling price of P12,000,000. On that date, the net assets of the division had a
book value of P14,000,000. For the period January 1, 2019 to the date of disposal, the division reported a
pretax profit from operations of P4,500,000. The company's income tax rate is 30%. Stamp Holding Company
generated after-tax profits of P15,000,000 from its continuing operations.

How much is the profit or loss to be reported in the Statement of Comprehensive Income for the
year 2019?
a. 1,750,000 c. 16,750,000
b. 3,150,000 d. 18,150,000

4. On October 1, 2020, Builder Company has a building with a cost of P4,000,000 and accumulated depreciation
of P3,100,000. The company commits to a plan to sell the building by February 1, 2021. On October 1,
2020, the building has an estimated selling price of P800,000, and it is estimated that selling costs associated
with the disposal of the building will be P80,000. On December 31, 2020, the estimated selling price of the
building has increased to P1,200,000, with estimated selling costs remaining at P120,000.

Question 1: At what amount should the non-current asset be measured at the time of
reclassification?
a. P720,000 c. P 900,000
b. P800,000 d. P1,080,000

Question 2: As of December 31, 2020, what amount of gain on recovery should Builder Company
recognize related to the asset held for sale?
a. None c. P220,000
b. P180,000 d. P400,000

5. On January 1, 2021, Lithium Company classifies a property as non-current asset held for sale. Immediately
before the classification as held for sale, the cost of the property is P100,000 and accumulated depreciation of
P 40,000. The property is depreciated using the straight-line method with a useful life of 10 years. The estimate
of the fair value less cost to sell on this date was P62,000.

What amount of impairment loss should Lithium Company recognize at the date the asset was
reclassified as held for sale?
a. 38,000 b. 12,000 c. 2,000 d. 0

6. On January 1, 2019, Polo Company classified as held for sale a non-current asset with a carrying amount of
P5,000,000. On this date the non-current asset is expected to be sold for P4,600,000 with an expected cost
to sell in the amount of P200,000. The non-current asset has a remaining useful life of 5 years. By December
31, 2019, the non-current asset has yet to be sold and the management after considering its options decided
to place back the non-current asset into operations. The non-current asset is now estimated to be sold for
P4,300,000 with an estimated selling cost of P50,000.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4202
Week 1: DISCONTINUED OPERATION & NON-CURRENT ASSETS HELD FOR SALE

At what amount should the non-current asset be reported in the statement of financial position on
December 31, 2019?
a. P4,000,000 c. P4,400,000
b. P4,250,000 d. P5,000,000

7. On January 1, 2020, Hydrogen Company classifies a hotel property as non-current asset held for sale.
Immediately before the classification as held for sale, the carrying amount of the hotel property is
P400,000,000(cost of P500,000,000 and accumulated depreciation of P100,000,000). The hotel property is
depreciated using the straight-line method with a useful life of 50 years. The estimated fair value less cost
to sell on this date was P350,000,000. On January 1, 2021, no buyer could be identified. On this date,
management concludes that the criteria for classification as held for sale could not be met. The estimated
fair value less cost to sell was revised to P340,000,000 while the value in use at that time was estimated at
P 380,000,000.

Question 1: How much should be taken to profit or loss on the date the asset was reclassified
back to property plant and equipment?
a. 30,000,000 b. 50,000,000 c. 100,000,000 d. 0

Question2: How much is the depreciation expense for the year 2021 after the asset was
reclassified back to property, plant and equipment?
a. 10,000,000 b. 8,974,359 c. 8,717,949 d. 9,743,590

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