MODULE 10 Non-current Assets Held for Sale

LEARNING OBJECTIVES:
1. Describe the criteria for held for sale classification.
2. State the initial and subsequent measurement of held for sale assets.
3. State the presentation requirements of discontinued operation.

OVERVIEW
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account
for non-current assets held for sale (or for distribution to owners). In general terms, assets (or
disposal groups) held for sale are not depreciated, are measured at the lower of carrying
amount and fair value less costs to sell, and are presented separately in the statement of
financial position. Specific disclosures are also required for discontinued operations and
disposals of non-current assets.

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An entity classifies a non-current asset as held-for-sale if its carrying amount will be

recovered mainly through selling the asset rather than through usage.

When a company makes the decision to sell an asset or to stop some part of its business, it is
making a decision that affects the future cash flows, profitability and overall financial situation.
The users of the financial statements should be informed about these events. Therefore, PFRS
5 Non-Current Assets Held for Sale and Discontinued Operations was issued to highlight the
results from continued operations and to separate them from the results of the ongoing
activities.

Classification as Held for Sale

A noncurrent asset (or disposal group) is classified as held for sale or held for distribution to
owners it its carrying amount will be recovered principally through sale transaction rather than
through continuing use.

Assets classified as noncurrent in accordance with PAS1 are classified as current only if they
meet the criteria to be classified as held for sale under PFRS 5.

Held-for-sale classification
In general, the following conditions must be met for an asset (or 'disposal group') to be classified
as held for sale:
o management is committed to a plan to sell
o the asset is available for immediate sale
o an active programme to locate a buyer is initiated
o the sale is highly probable, within 12 months of classification as held for sale (subject to
limited exceptions)
o the asset is being actively marketed for sale at a sales price reasonable in relation to its
fair value
o actions required to complete the plan indicate that it is unlikely that plan will be signifi-
cantly changed or withdrawn
Exception to the one-year requirement
An asset classified as held for sale, that is not sold within 1 year is continued to be classified as
held for sale if the following conditions are met:
a. The delay is caused by events beyond the entity’s control; and
b. There is sufficient evidence that the entity remains committed on selling the asset (or
disposal group).

If none of the above conditions are met, the asset will be reclassified back to its previous
classification (e.g., PPE).

Measurement
Held for sale assets are initially and subsequently measured at the lower of carrying
amount and fair value less cost to sell.

Changes in fair value less cost to sell

Subsequent changes in fair value less cost to sell are recognized in profit or loss, and
impairment losses or gains on reversal of impairment. However, gain on reversal of impairment
is recognized only to the extent of cumulative impairment losses previously recognized.

Depreciation and amortization

Held for sale assets are not depreciated or amortized while they are classifies as held for sale.

Changes to a plan to sell

The asset that ceases to be classified as held for sale is measured at the lower of asset’s
a. Carrying amount before it was classified as held for sale, adjusted for any depreciation,
amortization or revaluation that would have been recognized had the asset not been
classified as held for sale; or
b. Recoverable amount – the higher of fair value less cost of disposal and its value in use,
at the date of subsequent decision not to sell.

Discontinued operation
A discontinued operation is “ a component of an entity that either has been disposed of or is
classified as held for sale, and
a. Represent a major line of business or geographical area of operations;
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.” (PFRS 5.32)

Illustration:
On March 1, 20x1, A Co. classifies a component of an entity as held for sale and make the
following estimates:

a. Estimated gain on sale of some assets of the component, 100,000.

b. Estimated impairment losses and losses on sale of the remaining assets ot he
component, 200,000.
c. Estimated operating losses prior to the expected date of sale, 300,000.

The actual result of operations of the component for sale are as follows:
January1 to February 28, 20x1 – 50,000 profit
March 1 to December 31, 20x1 – 1,000,000 loss
Assuming tax rate of 30%, and actual sale occurred in 20x2.

Solutions:
Jan. – Feb. profit from operations 50,000
Mar. – Dec. loss prom operations (1,000,000)
Estimated impairment losses and losses on sale (200,000)
Total (1,150,000)
Multiply by (70% net of tax) x 50%
Loss from discontinued operations (805,000)

Note: both the estimated gain on disposal and estimated operating losses are
disregarded.
MODULE 10 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
NON-CURRENT ASSETS HELD FOR SALE
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. On December 31, 2022, Charmaine Co. committed to a plan to sell a manufacturing facility in its
present condition and classifies the facility as held for sale at this date. After a firm purchase
commitment is obtained, the buyer’s inspection of the property identifies environmental damage
not previously known to exist. Charmaine is required by the buyer to make good the damage,
which will extend the period required to complete the sale beyond one year. However, the entity
has initiated actions to make good the damage, and satisfactory rectification of the damage is
highly probable. On December 31, 2022, the carrying value of the facility is P4,000,000 and its
fair market value is P3,600,000.

In its December 31, 2022 balance sheet, Charmaine Co. should properly report this
manufacturing facility as:
a. should no longer be included in the December 31,2022 balance sheet
b. should be included among the property, plant, and equipment at P4,000,000
c. should be included among the property, plant, and equipment a P3,600,000
d. should be reported separately as non-current asset held for disposal and valued at
P3,600,000
2. On January 2, 2022 Windows Co. intends to sell its building with a carrying value of 3,800,000
but with a fair value of 4,200,000 but will continue to use the asset until the construction of a
new building is completed. The current building has a remaining useful life of 10 years.

On January 2, 2022, Windows co. should classify the building as

a. Property, plant and equipment valued at 3,800,000
b. Property, plant and equipment valued at 4,200,000
c. Non-current asset held for sale and valued at 3,800,000
d. Non-current asset held for sale and valued at 4,200,000
3. On January 2, 2022, X co. is committed to a plan to sell a manufacturing facility and has initiated
action to locate a buyer. Any uncompleted customer orders will be transferred to the buyer. The
fair value of the facility is 6,000,000 and its carrying value as of January 2, 2022 is 5,600,000.

On January 2, 2022, X co. should classify the building as

a. PPE valued at 6,000,000
b. PPE valued at 5,600,000
c. Non-current asset held for sale valued at 6,000,000
d. Non-current asset held for sale valued at 5,600,000
4. On December 1, 2022 Richard co. acquired through foreclosure a property comprising land and
building that it intends to sell. However, Richard does not intend to transfer the property of a
buyer until after it completes renovations to increase the property’s sales value. As of December
31, 2022, Richard has paid a total amount of 100,000 for the partial renovation of the property
and the property is currently selling at 7,600,000.

In its December 31, 2022 balance sheet, Richard co. should report its held for sale property at
a. 0
b. 7,000,000
c. 7,100,000
d. 7,600,000

5. On July 2022, Vince Carter is committed to a plan to sell a disposal group that represents a
significant portion of its regulated operations. The sale requires regulatory approval, which could
extend the period required to complete the sale beyond one year. Actions necessary to obtain that
approval cannot be initiated until after a buyer is known and a firm purchase commitment is
obtained. However, a firm purchase commitment is highly probable within one year. The non-
current assets of disposal group have a carrying value of 5,000,000 and liabilities of 1,000,000.
The assets total fair value as of December 31, 2022 of the disposal group is 4,800,000. If the sale
is completed within one year, the estimated cost to sell is 200,000, but if the sale will exited
beyond one year, the present value of the estimated cost to sell is 180,000.

If the sale will extend beyond one year, what amount of non-current asset should Vince Carter
report its held for sale property at December 31, 2022?
a. 3,600,000
b. 3,620,000
c. 4,000,000
d. 4,620,000

6. On July 1, 2022, Blazers Co. has a building with a cost of 4,000,000 and accumulated
depreciation of 1,600,000. On the same date, Blazers Co. commits to a plan to sell the building
by February 1, 2023. The building has a fair value of 2,000,000 and it is estimated that the
selling cost of the building will be 150,000. As of July 1, 2022, the building has a remaining life
of 15 years.

What is the amount to be reported as the carrying value of the building held for sale as of
December 31, 2022?
a. 1,788,333
b. 1,850,000
c. 1,933,333
d. 2,000,000

What is the amount of loss to be recognized by Blazers co. in its income statement as a result of
reclassification?
a. none
b. 150,000
 c. 400,000
d. 550,000

7. On September 1, 2022, Cement Company has a building with a cost of 4,000,000 and
accumulated depreciation of 3,100,000. The company commits to a plan to sell the building by
February 1, 2023. On September 1, 2022, the building has an estimated selling price of 800,000,
and it is estimated selling cost associated with the disposal of the building will be 120,000. On
December 31, 2022, the estimated selling price of the building has increased to 1,200,000, with
estimated selling costs remaining at 120,000.
1. At the time of reclassification as held for sale, what amount should the noncurrent asset
held for sale be recognized?
a. 680,000
b. 780,000
c. 800,000
d. 900,000

2. What amount of loss should Cement Company recognize at the time the building was
reclassified as held for sale?
a. None
b. 100,000
c. 120,000
d. 220,000

3. As of December 31, 2022, what amount of gain on recovery should cement Company
recognize related to the asset held for sale?
a. None
b. 180,000
c. 220,000
d. 400,000