Financial reporting

By: Yurasova Irina Olegovna,

Associate Professor,
Department of Audit & Corporate Reporting
iyurasova@fa.ru
IFRS 5 NON-CURRENT ASSETS
HELD FOR SALE AND
DISCONTINUED OPERATIONS
Key terms
Disposal group. 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.
Cash-generating unit. The smallest
identifiable group of assets for which
independent cash flows can be identified and
measured
IFRS 5 does not apply to
(a) Deferred tax assets (IAS 12)
(b) Assets arising from employee benefits (IAS 19)
(c) Financial assets (IFRS 9)
(d) Investment properties accounted for in
accordance with the fair value model (IAS 40)
(e) Agricultural and biological assets (IAS 41)
(f) Insurance contracts (IFRS 4)
Classification
'An entity shall classify a non-current asset as held for sale if its
carrying amount will be recovered principally through a sale
transaction rather than through continuing use’

the asset 'must be available for immediate sale in its present condition'
the sale must be highly probable

– management are 'committed to a plan to sell the asset'

– there is an 'active programme to locate a buyer', and
– the asset is being 'actively marketed at a price that is reasonable’
– the sale is expected to be completed 'within one year from the date of
classification' as held for sale
– 'it is unlikely that significant changes to the plan will be made or that the
plan will be withdrawn'
Classification (cont’d)
 > 1 y. – delay caused by events or
circumstances beyond the entity's control
 acquiring a disposal group - the sale is
expected within one year and it ishighly
probable that all the other criteria will be
met within a short time
 an asset to be abandoned should not be
classified as held for sale
Question
On 1 December 20X3, a company became committed to a
plan to sell a manufacturing facility and has already found a
potential buyer. The company does not intend to discontinue
the operations currently carried out in the facility. At 31
December 20X3 there is a backlog of uncompleted customer
orders. The company will not be able to transfer the facility to
the buyer until after it ceases to operate the facility and has
eliminated the backlog of uncompleted customer orders. This
is not expected to occur until spring 20X4.
Required
Can the manufacturing facility be classified as 'held for sale'
at 31 December 20X3?
Answer
The facility will not be transferred until the backlog of
orders is completed (the facility is not available for
immediate sale in its present condition).
The facility cannot be classified as 'held for sale' at
31 December 20X3. It must be treated in the same way as
other items of PPE.
Measurement. Key terms
 Fair value. The price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
 Costs of disposal. The incremental costs directly
attributable to the disposal of an asset (or disposal group),
excluding finance costs and income tax expense.
 Recoverable amount. The higher of an asset's fair value
less costs of disposal and its value in use.
 Value in use. The present value of estimated future cash
flows expected to arise from the continuing use of an
asset and from its disposal at the end of its useful life
Measurement
Non-current assets that qualify as held for
sale should be measured at the lower of:
 their carrying amount and
 fair value less costs to sell.
Measurement (impairment
loss)
 should be recognised where fair value
less costs of disposal is lower than
carrying amount
 charged to profit or loss.
Measurement
Measurement (depreciation)
Held for sale non-current assets should be:
not depreciated/amortised.
NCA no longer classified as
held for sale
measured at the lower of:
(a) Its carrying amount before it was
classified as held for sale, adjusted for
any depreciation that would have been
charged had the asset not been held for
sale
(b) Its recoverable amount at the date of
the decision not to sell
Illustration
 An item of PPE measured under the
revaluation model has a revalued carrying
amount of $76m at 1 January 20X1 and a
remaining useful life of 20 years (and a
zero residual value). On 1 July 20X1 the
asset met the criteria to be classified as
held for sale. Its fair value was $80m and
costs to sell were $1m on that date.
Solution
 The asset is depreciated to 1 July 20X1 reducing its carrying
amount by $1.9m ($76m/20 years × 6/12) to $74.1m. The asset
is revalued (under IAS 16) to $80m on that date and a gain of $5
.9m ($80m-$74.1m) is recognised in OCI
 On classification as held for sale, the asset is remeasured to fair
value less costs to sell of $79m ($80m–$1m) as this is lower
than its carrying amount ($80m). The loss of $1m is recognised
in PL
 The asset is no longer depreciated and is presented as a separate
line item 'Non-current assets held for sale’ at $79m within
current assets.
Presentation
(a) should not be offset.
(b) should be separately disclosed either
on the face of the statement of financial
position or in the notes.
(c) to be shown as a separate component
of current assets/current liabilities.
Proforma presentation
Proforma presentation
(cont’d)
Additional disclosures
(a) A description of the non-current asset
(or disposal group)
(b) A description of the facts and
circumstances of the disposal
(c) Any gain or loss recognised when the
item was classified as held for sale
Non-current assets to be
abandoned
Question
On 1 January 20X1, Michelle 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 20X3, Michelle Co
decides to sell the machine and starts actions to locate a buyer.
The machines are in short supply, so Michelle Co is confident
that the machine will be sold fairly quickly. Its market value at
30 September 20X3 is $13,500 and it will cost $500 to
dismantle the machine and make it available to the purchaser.
The machine has not been sold at the year end.
At what value should the machine be stated in Michelle
Co’s statement of financial position at 31 December
20X3?
Solution
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 operations

is part of a single co-ordinated plan to dispose of a

separate major line of business or geographical area

of operations, or
is a subsidiary acquired exclusively with a view to

resale'
Component of an entity
Operations and cash flows that can be
clearly distinguished, operationally and
for financial reporting purposes, from
the rest of the entity
Discontinued operations
 Discontinued operations are required to be shown
separately in order to help users to predict future
performance, i.e. based upon continuing operations.
 An entity must disclose a single amount on the face of the
statement of profit or loss, 'comprising the total of:
 the post-tax profit or loss of discontinued operations,

and
 the post-tax gain or loss recognised on the

measurement to fair value less costs to sell or on the

disposal of the assets constituting the discontinued
operation’
Discontinued operations
An analysis of the single amount must be presented,
either in the notes or on the face of the statement of
profit or loss.
The analysis must disclose:
the revenue, expenses and pre-tax profit or loss of
discontinued operations
the related income tax expense
the gain or loss recognised on the measurement to fair
value less costs to sell or on the disposal of the assets
constituting the discontinued operation
Presentation
 PL
or
 Notes

 CFS
or
 Notes
Proforma presentation
Proforma presentation
(cont’d)
Example

 An entity has stopped using certain plants

because of a downturn in orders. It is
maintaining the plant as the entity hopes
that orders will pick up in future.
Additionally, it intends to shut down one-
half of its manufacturing base. The units to
be closed constitute a major segment of its
business and will close in the current
financial year
Answer

 The equipment will not be treated as

abandoned as it will subsequently be
brought back into usage, and the
manufacturing units will be treated as
discontinued operations.
 Question
On 20 October 20X3 the directors of a parent company made a public
announcement of plans to close a steel works. The closure means that
the group will no longer carry out this type of operation, which until
recently has represented about 10% of its total revenue. The works will
be gradually shut down over a period of several months, with complete
closure expected in July 20X4. At 31 December output had been
significantly reduced and some redundancies had already taken place.
The cash flows, revenues and expenses relating to the steel works can
be clearly distinguished from those of the subsidiary's other operations.
Required
How should the closure be treated in the financial statements for the year
ended 31 December 20X3?
Answer
Steel works is being closed, rather than sold, it cannot be
classified as 'held for sale'. In addition, the steel works is
not a discontinued operation. Although at 31 December
20X3 the group was firmly committed to the closure, this
has not yet taken place nor can its assets be classified as
held for sale, therefore the steel works must be included
in continuing operations. Information about the planned
closure could be disclosed in the notes to the financial
statements.
Example
https://reports.metroag.de/annual-report/
2018-2019/notes/other-notes/43-disconti
nued-operations.html
IAS 40 INVESTMENT
PROPERTY
Investment property
property (land or a building – or part of a building –
or both) held (by the owner or by the lessee
under a finance lease) to earn rentals or for
capital appreciation or both, rather than for:
(a) Use in the production or supply of goods or
services or for administrative purposes, or
(b) Sale in the ordinary course of business
Key terms
 Owner-occupied property is property held by the owner
(or by the lessee under a finance lease) for use in the
production or supply of goods or services or for
administrative purposes.
 Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
 Cost is the amount of cash or cash equivalents paid or the
fair value of other consideration given to acquire an asset
at the time of its acquisition or construction.
 Carrying amount is the amount at which an asset is
recognised in the statement of financial position.
Examples
(a) Land held for long-term capital appreciation
rather than for short-term sale in the ordinary
course of business
(b) A building owned by the reporting entity (or
held by the entity under a finance lease) and
leased out under an operating lease
(c) A building held by a parent and leased to a
subsidiary*.
(d) Property that is being constructed or
developed for future use as an investment
property
Check your understanding
Rich Co owns a piece of land. The
directors have not yet decided whether
to build a factory on it for use in its
business or to keep it and sell it when
its value has risen.
Would this be classified as an investment
property under IAS 40?
Yes!
Recognition
(a) It is probable that the future
economic benefits that are associated
with the investment property will flow
to the entity.
(b) The cost of the investment property
can be measured reliably
measurement
 Initially at cost, including
transaction costs

 The fair value model

 The cost model

*should be applied to all of its

investment property
Fair value model
(a) After initial recognition, an entity that chooses the
fair value model should measure all of its
investment property at fair value, except in the
extremely rare cases where this cannot be
measured reliably. (*apply the IAS 16 cost model)
(b) A gain or loss arising from a change in the fair
value of an investment property should be
recognised in net profit or loss for the period in
which it arises.
(c) The fair value of investment property should
reflect market conditions at the end of the
reporting period
 issues relating to fair
value
 Fair value assumes that an orderly transaction has taken place between
market participants, ie both buyer and seller are reasonably informed about
the nature and characteristics of the investment property.
 A buyer participating in an orderly transaction is motivated but not
compelled to buy. A seller participating in an orderly transaction is neither
an over-eager nor a forced seller, nor one prepared to sell at any price or to
hold out for a price not considered reasonable in the current market.
 Fair value is not the same as 'value in use' as defined in IAS 36 Impairment
of assets. Value in use reflects factors and knowledge specific to the entity,
while fair value reflects factors and knowledge relevant to the market.
 In determining fair value an entity should not double count assets.
 In those rare cases where the entity cannot determine the fair value of an
investment property reliably, the cost model in IAS 16 must be applied until
the investment property is disposed of. The residual value must be
assumed to be zero.
Cost model
 The cost model is the cost model in
IAS 16.
 Investment property should be
measured at depreciated cost, less any
accumulated impairment losses.
 An entity that chooses the cost model
should disclose the fair value of its
investment property.
Changing models
 Once the entity has chosen the fair value
or cost model, it should apply it to all its
investment property.
 It should not change from one model to
the other unless the change will result in a
more appropriate presentation.
 IAS 40 states that it is highly unlikely that
a change from the fair value model to the
cost model will result in a more
appropriate presentation.
Transfers
 Transfers to or from investment property should only be made
when there is a change in use. For example, owner occupation
commences so the investment property will be treated under
IAS 16 as an owner-occupied property.
 When there is a transfer from investment property carried at
fair value to owner-occupied property or inventories, the
property's cost for subsequent accounting under IAS 16 or IAS
2 should be its fair value at the date of change of use.
 Conversely, an owner-occupied property may become an
investment property and need to be carried at fair value. An
entity should apply IAS 16 up to the date of change of use. It
should treat any difference at that date between the carrying
amount of the property under IAS 16 and its fair value as a
revaluation under IAS 16.
example
 A business owns a building which it has been using
as a head office. In order to reduce costs, on 30
June 20X9 it moved its head office functions to one
of its production centres and is now letting out its
head office. Company policy is to use the fair value
model for investment property.
 The building had an original cost on 1 January
20X0 of $250,000 and was being depreciated over
50 years. At 31 December 20X9 its fair value was
judged to be $350,000.
 How will this appear in the financial statements at
31 December 20X9?
Solution
The building will be depreciated up to 30 June 20X9.
$
Original cost 250,000
Depreciation 1.1.X0 – 1.1.X9 (250/50 * 9) (45,000)
Depreciation to 30.6.X9 (250/50 * 6/12) (2,500)
Carrying amount at 30.6.X9 202,500
Revaluation surplus 147,500
Fair value at 30.6.X9 350,000
Disposals
 Derecognise (eliminate from the statement of financial
position) an investment property on disposal or when it is
permanently withdrawn from use and no future economic
benefits are expected from its disposal.
 Any gain or loss on disposal is the difference between the
net disposal proceeds and the carrying amount of the
asset. It should generally be recognised as income or
expense in profit or loss.
 Compensation from third parties for investment property
that was impaired, lost or given up shall be recognised in
profit or loss when the compensation becomes receivable
Disclosure requirements
 Choice of fair value model or cost model
 Whether property interests held as operating
leases are included in investment property
 Criteria for classification as investment property
 Assumptions in determining fair value
 Use of independent professional valuer
(encouraged but not required)
 Rental income and expenses
 Any restrictions or obligations
additional disclosures
 Fair value model - reconciliation of the
carrying amount of the investment
property at the beginning and end of
the period.
 Cost model - depreciation method + the
fair value of the investment property