chapter 19 non-current assets held for sale and ... · chapter 19: non-current assets held for sale...

Chapter 19:

CHAPTER 19

NON-CURRENT ASSETS HELD FOR SALE and DISCONTINUED OPERATIONS

1. BACKGROUND The objective of IFRS 5 – Non-current assets held for sale and discontinued operations is to “specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations.” The presentation and disclosure of discontinued operations is dealt with in Part A. The objective underlying the disclosure of discontinued operations is that economic decisions that are taken by users of financial statements require an evaluation of the ability of the entity to generate cash and cash equivalents. By separately highlighting the results of discontinued operations, users are provided with information that is relevant in assessing the ongoing ability of the entity to generate future cash flows. Likewise, the presentation and disclosure of non-current assets and disposal groups held for sale which is covered in Part B, will also assist users in their investment decisions. Non-current assets and disposal groups are separated from other assets as their nature and use have now changed. Identifying assets (or asset groups) whose value will be mainly recovered through sale rather than through use has significant implications for cash flows. Some criticism of this standard results from the accounting treatment specified in the standard which seems more rule-based rather than principle-based. For example, paragraph 25 requires that an entity shall not depreciate (or amortise) a non-current asset while it is classified as held for sale or part of a disposal group classified as held for sale. As the classification is based on a management decision that may have not yet been fully carried out (rather than a sound principle), this could be interpreted as conceptually wrong.

PART A – DISCONTINUED OPERATIONS 2. DEFINITIONS IFRS 5 in Appendix A defines a component of an entity as one where the operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. This is often synonymous with the level at which the operations are evaluated separately for internal reporting purposes. A component of an entity may be a cash-generating unit or any group of cash-generating units. A discontinued operation is a component of an entity that either: (a) has been disposed of, or (b) 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.

It is important to note that not all non-current assets (or disposal groups) held for sale will necessarily arise as a result of a discontinued operation. This is because an entity can also classify a non-current

Chapter 19: Non-current Assets Held For Sale and Discontinued Operations

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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. An entity classifies 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 (paragraph 6). For such a classification to be made:

• the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable1;

• for the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset or (disposal group);

• an active programme to locate a buyer and complete the plan must have been initiated2; • the asset (or disposal group) is being actively marketed for sale at a price that is reasonable in

relation to its current fair value3; • the sale should be expected to qualify for recognition as a completed sale within one year

from the date of classification (with limited exceptions); and • actions required to complete the plan indicate that it is unlikely that significant changes to the

plan will be made or that the plan will be withdrawn4. 1 eg. If the seller imposes a restriction that it will continue to use, and therefore not vacate, a building which it has taken a

decision to dispose of once completion of the construction of its new head office building is completed, then this indicates that the building is currently not held for sale and therefore cannot be so classified.

2 eg. If the seller has not actively marketed the asset by informing potential buyers that the asset is available for sale, then

this indicates that the asset is currently not held for sale and therefore cannot be so classified. 3 eg. The seller intends to dispose of an asset, but during the year market conditions deteriorate and the asset is not sold by

the end of the year. If the asset continues to be held for sale but at a price in excess of its fair value, then in the absence of a price reduction the asset is not available for immediate sale.

4 eg. The seller intends to dispose of a parcel of land and buildings but requires an environmental impact study to be

conducted. It is likely that this may result in a portion of the land being withdrawn from the sale. If this happens, significant changes to the plan will have to be made and the asset cannot therefore be classified as held for sale.

Paragraph 8A clarifies that when an entity is committed to a sale plan involving loss of control of a subsidiary, the entity classifies the assets and liabilities of that subsidiary as held for sale when the above criteria are met regardless of whether the entity retains a controlling interest in its former subsidiary after the sale. Events or circumstances may extend the period to complete the sale beyond one year. An exception to the one-year requirement in the criteria above shall therefore apply in the following situations in which such events or circumstances arise (appendix B):

• at the date an entity commits itself to a plan to sell a non-current asset (or disposal group), it reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset (or disposal group) that will extend the period required to complete the sale, and actions necessary to respond to those conditions cannot be initiated until after a firm purchase commitment is obtained, and a firm purchase commitment is highly probable within one year.

• an entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly impose conditions on the transfer of a non-current asset (or disposal group) previously classified as held for sale that will extend the period required to complete the sale, and timely actions necessary to respond to the conditions have been taken, and a favourable resolution of the delaying tactics is expected.

• during the initial one-year period, circumstances arise that were previously considered unlikely and, as a result, a non-current asset (or disposal group) previously classified as held for sale is not sold by the end of the period, and during the initial one-year period the entity took action necessary to respond to the change in circumstances, the non-current asset (or


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disposal group) is being actively marketed at a price that is reasonable (given the change in circumstances), and the original criteria remain met.

For a non-current asset or disposal group to be classified as held for sale, the relevant criteria must be met before the reporting date. If the criteria are met after the reporting date but before the financial statements are authorized for issue, various disclosures are triggered (see below). 3 . RECOGNITION AND MEASUREMENT The recognition and measurement of changes in assets and liabilities, and the income and expenses relating to the discontinued operation are discussed in Part B. IAS 37 Provisions, contingent liabilities and contingent assets however, makes reference to restructuring. Paragraph 70 of IAS 37 includes the sale or termination of a line of business as a restructuring. In accordance with IAS 37 Provisions, contingent liabilities and contingent assets, a provision is only recognised when:

• an entity has a present obligation (legal or constructive) as a result of a past event; • it is probable that an outflow of resources embodying economic benefits will be required to

settle the obligation; and • a reliable estimate can be made of the amount of the obligation.

A constructive obligation to restructure exists when both of the following conditions have been met: • the entity has a detailed formal plan for restructuring, identifying, at least, the business or part

of the business concerned, the principal locations affected, the location, function, and approximate number of employees who will be compensated for terminating their services, the expenditures to be undertaken, and when the plan will be implemented; and

• the entity has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan (for example, the discontinuance) or by announcing its main features to those affected by it.

A present obligation cannot arise in respect of the discontinued operation through sale thereof until the entity has entered into a binding sale agreement. Consequently, a provision for restructuring cannot be raised until a binding sale agreement has been entered into. A restructuring provision includes those direct expenditures arising from the restructuring, that are both:

• necessarily entailed in the discontinuance, and • not associated with the ongoing activities of the entity.

A restructuring provision therefore does not include:

• costs of retraining staff, • costs of relocating staff, • marketing costs, or • investments in new systems.

4. PRESENTATION AND DISCLOSURE An entity shall present and disclose information that enables users of the financial statements to evaluate the financial effects of discontinued operations and disposals of non-current assets or disposal groups. Statement of comprehensive income disclosure: An entity shall disclose: (a) a single amount on the face of the statement of comprehensive income comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on


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the disposal of the assets or disposal group(s) constituting the discontinued operation. (b) an analysis of the single amount in (a) into: (i) the revenue, expenses and pre-tax profit of loss of discontinued operations; (ii) the related income tax expense; (iii) the gain or loss on measurement to fair value less costs to sell or on the disposal of the

assets or disposal group(s) constituting the discontinued operation; and (iv) the related income tax expense. This analysis may be presented in the notes or on the face of the statement of comprehensive

income in a section identified as relating to discontinued operations. (The analysis is not required for disposal groups that are newly acquired subsidiaries that meet the criteria to be classified as held for sale on acquisition.)

(c) the net cash flows attributable to the operating, investing and financing activities of discontinued operations (presented either in the notes or on the face of the financial statements). (These disclosures are not required for disposal groups that are newly acquired subsidiaries that meet the criteria to be classified as held for sale on acquisition.)

Paragraph 33A requires an entity which presents the components of profit or loss in a separate income statement as described in paragraph 81 of IAS 1 (as revised in 2007), to present a section identified as relating to discontinued operations in that separate income statement. Comparatives must be presented for all the above disclosures so that the disclosures relate to all operations that have been discontinued by the reporting date for the latest period presented. Adjustments in the current period to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period shall be classified separately in discontinued operations, together with the nature and amount of such adjustments. If an entity ceases to classify a component of an entity as held for sale, the results of operations of the component previously presented in discontinued operations shall be reclassified and included in income from continuing operations for all periods presented. The amounts of prior periods shall be described as having been re-presented. Any gain (or loss) on the re-measurement of a non-current asset (or disposal group) classified as held for sale that does not meet the definition of a discontinued operation shall be included in profit or loss from continuing operations. Statement of financial position disclosures These are detailed in Part B.


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Illustrative example 19.1: Statement of comprehensive income disclosures Hope Limited received and accepted an offer from PAASI Limited to acquire its paper manufacturing division for R300 million (less costs to sell) on 30 June 20.7. The carrying amount of the net assets disposed of was R200 million. A capital profit of R20 million was realised on this sale. The corporate normal tax rate is 35% and capital gains tax has always been in effect on 50% of corporate capital gains. Set out below are extracts from the statement of comprehensive income of the paper manufacturing division: 20.7 20.6 R'million R'million Revenue 801 2 000 Cost of sales (200) (1 000) Gross profit 601 1 000 Administrative expenses (10) - Severance pay (permanent difference) (12)* - Penalties for premature termination of timber supply contracts (permanent difference)

( 8)*

-

Termination of agricultural lease contracts (permanent difference) ( 2)* - Other expenses ( 1)* - Profit before tax 568 1 000 Income tax expense (206) ( 350) Profit after tax 362 650

Set out below are extracts from the statement of comprehensive income of Hope Limited (including the paper manufacturing division): 20.7 20.6 R’million R’million Revenue 100 000 90 000 Cost of sales (40 000) (30 000) Gross profit 60 000 60 000 Profit on disposal of paper division 100 - Administrative expenses (19 977) (10 000) Other expenses *(i.e. 12 + 8 + 2 + 1) ( 23) - Profit before taxation 40 100 50 000 Income tax expense – current (there are no temporary differences) ( 10 000) ( 20 000) Profit after tax 30 100 30 000 Required: Prepare the statement of comprehensive income and the accompanying notes of Hope Limited for the year ended 31 December 20.7 presenting the appropriate disclosures in respect of the discontinued operation.


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Solution:

HOPE LIMITED Calculation:

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.7

Continuing operations Note 20.7 20.6

R’mill R’mill

Revenue 99 199 88 000 (W1)

Cost of sales 39 800 29 000 (W1)

Gross Profit 59 399 59 000

Administrative expenses (19 967) (10 000) (W1)

Profit before tax 39 432 49 000

Income tax expense 2 ( 9 762) (19 650) From note 2

Profit for the year 29 670 29 350

Discontinued operations

Profit from discontinued operations 3 430 650 From note 3

Profit for the year 30 100 30 000

HOPE LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.7 20.7 20.6

R’mill R’mill Calculation:

Note 2. Taxation expense

South African normal tax – current 10 000 20 000 Given

Applied against profit before taxation, from: Tax rate recon.

• Continuing operations 9 762 19 650 Balancing figure

• Discontinued operations 206 350 Given

• Profit on sale of discontinued operation 32 - Note 3

10 000 20 000

Tax rate reconciliation:

Standard tax rate 35% 35%

Tax on profit before tax at the standard rate 14 035 17 500

- Continuing operations 13 801 17 150

- Discontinued operations 199 350

- Profit on disposal of discontinued operation 35 -

Portion of capital profit on sale of the paper division not subject to capital gains tax

( 4)

-

50% x 35% x R20 million

capital) Severance pay - the paper division 4 - 35%(12 given)

Termination of timber contracts 3 - 35%(8 given)

Termination of agricultural leases 1 - 35%(2 given)

Other – specify (4 039) 2 500 Balancing figure

Applied against profit before tax 10 000 20 000 Given

Effective tax rate 24.94% 40.00%


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HOPE LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.7 Calculation:

Note 3. Discontinued operation

As a result of an extremely good offer from PAASI Limited to acquire the paper manufacturing division on 30 June 20.7, the company signed a contract to sell its paper manufacturing division, previously reported in the manufacturing division. The discontinuance was finalised with the receipt of the proceeds during the current reporting period.

20.7 20.6

R’mill R’mill Revenue 801 2 000 Cost of sales (200) (1 000) Gross profit 601 1 000 Expenses ( 33)1 -

Profit before tax 568 1 000 Income tax expense (206) (350) 362 650 Profit on disposal of the paper manufacturing division

100

-

Given

Income tax expense

(32)

-

35%(R100 million –

R20 million) + 35% x 50% x R20

million 68 -

Profit from discontinued operation 430 650

(Note: The above analysis could also be presented on the face of the statement of comprehensive income.) Workings: (W1) Allocation of certain items (Note that the ‘Other expenses’ of R23m do not require allocation as they are expenses only of the discontinued operation.) Revenue Cost of sales Admin expense Tax expense 20.7 20.6 20.7 20.6 20.7 20.6 20.7 20.6 R'm R'm R'm R'm R'm R'm R'm R'm Total - given 100 000 90 000 40 000 30 000 19 977 10 000 10 000 20 000 Discontinued operation - given

( 801)

( 2 000)

(200)

( 1 000)

(10)

-

(238)2

(350)

99 199 88 000 39 800 29 000 19 967 10 000 9 762 19 650 1 20.7: R10 administrative salaries + R12 severance pay + R8 termination of timber supply contracts + R2 termination of agricultural leases + R1 sundry expenses. 2R206 (given income tax expense) + R32 (R20 million x 50% x 35%) CGT + [(R100 – R20) 35%)] normal tax on profit on disposal.


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Additional disclosures The following disclosures shall be made in the notes in the period in which a non-current asset (or disposal group) as held for sale has either been classified as held for sale or sold:

• a description of the non-current asset or disposal group; • a description of the facts and circumstances of the sale, or leading to the expected disposal,

and the expected manner and timing of that disposal; • the gain or loss recognised in accordance with IFRS 5 and, if not separately presented on the

face of the statement of comprehensive income, the caption in the statement of comprehensive income that includes that gain or loss; and

• if applicable, the segment in which the non-current asset (or disposal group) is presented under IFRS 8 Operating Segments.

If an entity had previously classified an asset (or disposal) group as held for sale but the criteria are no longer met or if an entity removes an individual asset or liability from a disposal group, then the entity shall disclose, in the period of the decision to change the plan to sell the non-current asset (or disposal group), a description of the facts and circumstances leading to the decision and the effect of the decision on the results of operations for the period and any prior periods presented. Illustrative example 19.2: Pictorial presentation - Non-current assets held for sale and associated liabilities

PICTORIAL LIMITED

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20.2

NOTE COMPANY GROUP

20.2 20.1 20.2 20.1

R’000

R’000

R’000

R’000

Non-current assets held for sale including disposal groups 14 400 - 560 -

Liabilities directly associated with non-current assets held for sale

14

200

-

360

-

1


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PICTORIAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AT 31 DECEMBER 20.2

14. Non-current assets held for sale (including disposal groups) and liabilities directly associated with non-current assets held for sale

COMPANY GROUP

20.2 20.1 20.2 20.1

R’000

R’000

R’000

R’000

Held for sale – individual assets 150 - 210 -

Disposal group 250 - 350 -

Property, plant and equipment 200 - 240 -

Intangible assets 50 - 110 -

Total assets held for sale including disposal groups

400

- 560

-

Non-current interest-bearing liabilities of disposal groups

(200)

-

(360)

-

Note: The presentation requirements for assets (or disposal groups) classified as held for sale at the end of the reporting period do not apply retrospectively. The comparative statements of financial position for any previous period are therefore not re-presented.

The above presentation thus also assumes that no non-current assets (or disposal groups) met the held for sale criteria in 20.1.

Certain of the company’s plant and equipment is superfluous to the company’s requirements and will be sold by public auction on the 31 March 20.3. The disposal group is in respect of the XXX cash-generating unit (previously reported in the group’s seafood segment) which management is committed to sell. The disposal group has met the criteria in IFRS 5 to be classified as ‘held for sale’. Management are actively seeking a buyer for the XXX operation and expect to finalise the sale by the 30 June 20.3. An impairment loss of R120 000 was recognised on the initial and subsequent measurement of the held for sale assets and disposal groups. This amount is shown in the Note to Discontinued Operations.


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PICTORIAL LIMITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.2 Note COMPANY GROUP 20.2 20.1 20.2 20.1 Continuing operations R’000

R’000

R’000

R’000

Revenue 28 102 100 99 500 200 000 182 000 Cost of sales (50 000) (45 500) (98 000) (90 000) Gross profit 52 100 54 000 102 000 92 000 Other income 4 500 6 000 8 500 7 500 Distribution costs (3 000) (2 500) (7 800 (3 000) Administrative expenses (4 500) (4 100) (5 400) (4 400) Other expenses (7 000) (6 900) (7 400) (7 300) Finance costs (6 500) (8 100) (9 000) (8 400) Share of profit of associates 18 000 24 000 18 000 24 000 Profit before tax 53 600 62 400 98 900 100 400 Tax expense 29 (22 000) (31 000) (35 000) (42 000) Profit for the year from continuing operations

31 600

31 400

63 900

58 400

Discontinued operations 30 500 400 1 500 1 300 Profit for the year 32 100 31 800 65 400 59 700 Attributable to: Equity holders of the parent - - 51 170 46 050 Profit from continuing operations - - 50 000 45 000 Profit from discontinuing operations - - 1 170 1 050 Non-controlling interest - - 14 230 13 650 Profit from continuing operations - - 13 900 13 400 Profit from discontinuing operations - - 330 250 - - 65 400 59 700


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PICTORIAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.2 Note 30: Discontinued operation On 30 December 20.2, due to a Board of Directors’ decision to concentrate on core activities, the group’s board committed itself to a plan to sell its seafood operation by public auction on 20 February 20.3. The seafood division is reported in the seafood segment in the segmental disclosures and consists of deep-sea fishing vessels owned and operated by Wave Limited (a subsidiary) and the seafood processing and packaging plant owned by the company. The discontinuance is expected to be completed by 31 May 20.3. COMPANY GROUP 20.2 20.1 20.2 20.1 R’000 R’000 R’000 R’000 Revenue 20 000 18 000 30 000 27 000 Expenses (19 000) (17 000) (28 000) (25 000) Profit before tax 1 000 1 000 2 000 2 000 Tax expense (300) (465) (600) (720) Profit for the year 700 535 1 400 1 280 Gain on measurement to fair value less costs to sell/Gain on disposal of assets

1 050

-

1 680

-

Tax expense (315) - (504) - Profit on gain 735 - 1 176 - Adjustments to prior periods

(935)

(135)

(1 076)

20

Discontinued operation 500 400 1 500 1 300 Net cash flows attributable to discontinued operation:

• to operating activities (1 000) (1 200) 2 100 1 800 • to investing activities 3 000 1 640 (600) (960) • to financing activities (2 500) (2 100) (1 300) (490) Total net cash flow (500) (1 660) 200 350


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Where the criteria for classification of a non-current asset (or disposal group) as held for sale are met after the reporting date If the criteria in IFRS 5 are met subsequent to the reporting date but before the financial statements are authorised for issue, then the entity shall disclose the information specified in paragraphs 41 (a), (b) and (d) in the notes to the financial statements (i.e. a description of the non-current asset or disposal group, a description of the facts and circumstances leading to the expected disposal and the expected manner and timing of that disposal, and if applicable, the segment in which it is presented).

Illustrative example 19.3: Pictorial presentation - Discontinued operation PICTORIAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.2 Note 30: Discontinued operation On 19 January 20.3 due to a Board of Directors’ decision to concentrate on core activities, the group’s board committed itself to sell its seafood operation consisting of only trawlers and fixed property by public auction on 20 February 20.3. The discontinuance is expected to be completed by 31 May 20.3. This operation is reported in the Seafood Segment.

Retroactive classification of an operation as discontinued when the criteria for classification are not met until after the reporting date is prohibited.

PART B – NON-CURRENT ASSETS (AND DISPOSAL GROUPS) HELD FOR SALE 5. SCOPE OF IFRS 5 The classification and presentation requirements of IFRS 5 apply to all recognised non-current assets and to all disposal groups of an entity. The measurement requirements of IFRS 5 apply to all recognised non-current assets and disposal groups of an entity with the exception of:

• deferred tax assets; • assets arising from employee benefits; • financial assets included in the scope of IAS 39 Financial Instruments: recognition and

measurement; • non-current assets that are accounted for in accordance with the fair value model in IAS 40

Investment property; • non-current assets that are measured at fair value less estimated point-of-sale costs in

accordance with IAS 41 Agriculture; and • contractual rights under insurance contracts as defined in IFRS 4 Insurance contracts.

A disposal group occurs when an entity disposes of a group of assets in a single transaction, possibly together with some directly associated liabilities. This disposal group may be a group of cash-generating units, a single cash-generating unit, or part of a cash-generating unit. Non-current assets or disposal groups that are classified as held for sale are carried at the lower of carrying amount and fair value less costs to sell. These assets are not depreciated and are disclosed separately on the face of the statement of financial position. The accounting for such an asset or disposal group is therefore a process of valuation rather than allocation. 6. CLASSIFICATION AS HELD FOR SALE

6.1 Definition A disposal group is defined as a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and the liabilities directly associated with those assets that will be


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transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated or if it is an operation within such a cash-generating unit. It is important to note that not all held for sale non-current assets (or disposal groups) will necessarily arise as a result of a discontinued operation. This is because an entity can also classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally by sale or otherwise rather than through continuing use. 6.2 Classification of non-current assets as held for sale For a non-current asset or disposal group to be classified as held for sale, the relevant criteria must be met before the end of the reporting period. These criteria are discussed in Part A. If the criteria are met in the period after the reporting date but before the financial statements are authorised for issue, then the entity shall disclose the information specified in paragraphs 41 (a), (b) and (d) in the notes to the financial statements (i.e. a description of the non-current asset or disposal group, a description of the facts and circumstances leading to the expected disposal and the expected manner and timing of that disposal, and if applicable, the segment in which it is presented). When an entity acquires a non-current asset (or disposal group) exclusively with a view to its subsequent disposal, the non-current asset (or disposal group) is classified as held for sale at the acquisition date only if the one year requirement is met (except as the exceptions permit) and it is highly probable that any other classification criteria that are not met at that date, will be met within a short period following the acquisition (usually within three months). If the held for sale criteria are met after the reporting period but before the financial statements are authorised for issue, an entity shall not classify a non-current asset (or disposal group) as held for sale in those financial statements when issued. However the entity shall disclose the information specified in paragraphs 41 (a), (b) and (d) in the notes to the financial statements (i.e. a description of the non-current asset or disposal group, and a description of the facts and circumstances leading to the expected disposal and the expected manner and timing of that disposal, and if applicable, the segment in which it is presented). 6.3 Non-current assets to be abandoned Because the carrying amounts of non-current assets (or disposal groups) to be abandoned will be recovered principally through continuing use, these assets (or disposal groups) should not be classified as held for sale, and should therefore continue to be depreciated/amortised until disposal thereof. If however, the disposal group to be abandoned meets the criteria in IFRS 5 to be classified as a discontinued operation, then the disclosures relevant to discontinued operations must be presented (see paragraphs 33 and 34). A non-current asset that has been temporarily taken out of use should not be accounted for as if it had been abandoned.


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7. MEASUREMENT OF A NON-CURRENT ASSET (OR DISPOSAL GROUP) CLASSIFIED AS HELD FOR SALE

7.1 The measurement principle Paragraph 15 requires an entity to measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell. The measurement rules derived from the measurement principle are:

• If a newly acquired asset (or disposal group) meets the criteria to be classified as held for sale, on

initial recognition it is measured at lower of its carrying amount and fair value less costs to sell. (This also applies to assets (or disposal groups) acquired as part of a business combination.)

• If the sale is expected to occur beyond one year (in rare circumstances), the entity shall measure the costs to sell at their present value.

• Immediately before the initial classification as held for sale, the carrying amounts of the assets (or liabilities) are measured in accordance with the applicable Standards and Interpretations.

• On subsequent re-measurement of a disposal group, the carrying amounts of any assets and liabilities that are not included in the scope of IFRS 5, but are included in a disposal group classified as held for sale, shall be remeasured in accordance with the applicable Standards before the fair value less costs to sell of the disposal group is measured.

Illustrative example 19.4: Assets scoped out of IFRS 5 During December 20.5, when the carrying amount of the land was R2 000, the reporting entity’s board approved its disposal and engaged an estate agent who actively marketed the land at its fair selling price of R2 000. Selling costs of R100 are expected to be incurred in selling the property. Prior to classification as held for sale the land was:

• Scenario 1: Investment property carried under the fair value model. • Scenario 2: Investment property carried under the cost model. • Scenario 3: Property, plant and equipment carried under the revaluation model. • Scenario 4: Property, plant and equipment carried under the cost model.

Required: Determine the statement of financial position classification and the amount at which the reporting entity should carry the land in its statement of financial position at 31 December 20.5. Solution: Under all scenarios the land is classified as held for sale and in accordance with IFRS 5 it is carried at R1 900 under scenarios 2, 3 and 4 (i.e. lower of carrying amount and selling price less costs to sell (IFRS 5 paragraph 15) and R2 000 under scenario 1 (as under scenario 1 measurement is in accordance with IAS 40/IFRS 13 as measurement of investment property carried under the fair value model is scoped out of IFRS 5 see paragraph 5 thereof).

7.2 Recognition of impairment losses and reversals

• An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell to the extent that it was not recognised on initial re-measurement.

• With regards to individual assets:

A gain is recognised for any subsequent increase in fair value less costs to sell. This may not be in excess of the cumulative impairment loss that was previously recognised in terms of IFRS 5 or IAS 36 Impairment of Assets.


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• With regards to disposal groups (paragraphs 22 and 23): A gain is recognised for any subsequent increase in fair value less costs to sell to the extent it was not recognised on initial re-measurement but not in excess of the cumulative impairment loss that was previously recognised in terms of IFRS 5 or IAS 36 Impairment of Assets. The impairment loss (or subsequent gain) reduces or increases the carrying amounts of the assets that are within the scope of IFRS 5 in the following order: - first to goodwill, and then to - the other assets in the group on the basis of the carrying amount of each asset in the group. Reversals are allocated to the assets, except for goodwill, based on the carrying amounts of those assets.

• A gain or loss not previously recognised by the time of the sale of a non-current asset (or disposal group) shall be recognised at the date of derecognition according to either IAS 16 in respect of Property, plant and equipment and IAS 38 in respect of Intangible assets (paragraph 24).

• A non-current asset should not be depreciated or amortised while it is classified as held for sale or while it is part of a disposal group classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale, shall continue to be recognised (paragraph 25).

Illustrative example 19.5: Asset carried at depreciated historic cost A Limited is committed to disposing the plant of its XXX cash-generating unit. At 30 June 20.3 all criteria are met for the plant to be classified as held for sale. The plant is carried under the cost model. Details of the XXX CGU’s plant at 30 June 20.3 are: Scenario 1 Scenario 2 R’000 R’000 Cost (purchased on 1 January 20.1) 1 000 1 000 Depreciation rate (straight-line to nil residual value) 10% 10% At 30 June 20.3: Fair value 700 700 Costs to sell 20 20 At 31 December 20.3: Fair value 700 780 Costs to sell 10 10 The disposal is expected to take place in February 20.4. Required: Prepare the journal entries (ignoring taxation) to record the non-current asset as held for sale for the year ended 31 December 20.3.


Chapter 19:

Solution: ( ) = credit Calculation: Scenario 1 Scenario 2 R’000 R’000 30 June 20.3 Depreciation (P/L) 10% x R1 000 000 cost x 6/12 months 50 50 Accumulated depreciation (50) (50) Recording depreciation for the 6 months ended 30 June 20.3

(R1 000 000 x 7.5/10 carrying amount)– (R700 000 fair value – R20 000 costs to sell)

Impairment loss (P/L) 70 70 Accumulated depreciation and impairment losses

(70)

(70)

Recognition of impairment loss on initial recognition of non-current asset as held for sale

30 June 20.3 Non-current asset held for sale

680

680

Plant (1 000) (1 000) Accumulated depreciation and impairment losses

320

320

Transfer of plant to non-current asset held for sale 31 December 20.3 Non-current asset held for sale

(R680 000 carrying amount – R690 000 fair

value less costs to sell); (R680 000 – R770 000 but limited to R70 000 accumulated impairment

losses since classification as held for sale)

10 70

Impairment loss reversed (P/L)

(10)

(70)

Re-measurement of held for sale asset

Note to the reader: Assets classified as held for sale are not depreciated.

Illustrative example 19.6: Asset carried at revalued amount A Limited is committed to disposing the plant of its XXX cash-generating unit. At 30 June 20.3 all criteria are met for the non-current assets to be classified as held for sale. Plant is carried under the revaluation model. Details of the XXX CGU’s plant and equipment are as follows: Scenario 1 Scenario 2 Scenario 3 R’000 R’000 R’000 Cost (all purchased on 1 January 20.1) 1 000 1 000 1 000 Depreciation rate (straight-line to nil residual value) 10% 10% 10% At 30 June 20.3: Carrying amount before classification as held for sale (after R53 000 depreciation for the 6 month period ended 30 June 20.3) 800 800 800 Fair value 890 890 890 Costs to sell 20 20 20 At 31 December 20.3: Fair value 860 1 000 750 Costs to sell 30 15 30


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Required: Prepare the journal entries (ignoring taxation) to record the recognition of the plant as held for sale for the year ended 31 December 20.3. The company operates a single plant account (i.e. you are not required to differentiate between the gross carrying amount and accumulated depreciation and accumulated impairment).

Solution: ( ) = credit Calculation: Scenario 1 Scenario 2 Scenario 3 R’000 R’000 R’000 To 30 June 20.3 Depreciation (P/L) Given 53 53 53 Accumulated depreciation (53) (53) (53) Depreciation for 6 months to 30 June 20.3

30 June 20.3 Plant (R890 000 fair value – R800 000

carrying amount) 90 90 90

Revaluation surplus reserve - OCI

(90) (90) (90)

Revaluation prior to reclassification

Impairment loss (P/L) Costs to sell 20 20 20 Plant (20) (20) (20) Recognition of impairment loss on reclassification of the plant as a non-current asset as held for sale (= costs to sell)

30 June 20.3 Non-current asset held for sale

870

870

870

Plant (870) (870) (870) Transfer of plant to non-current asset held for sale

31 December 20.3 Impairment loss for the year (P/L)

(R870 000 – R830 000); (R870 000 – R985 000 but limited to

R20 000); R870 000 – R720 000)

40

(20)

150

Non-current asset held for sale

Balancing figure (40)

20

(150)

Impairment loss remeasured at financial year end by comparing carrying amount to fair value less costs to sell

Note to the reader: The asset classified as held for sale is not depreciated. Only reversals of impairment losses are limited to prior period impairments.

The previous examples related to individual assets within the measurement requirements of IFRS 5. With regards to disposal groups, on subsequent re-measurement of a disposal group the measurement requirements of IFRS 5 do not apply to the non-current assets indicated in paragraph 5. Impairment losses that result from the subsequent re-measurement of a disposal group to the extent that it is attributable to assets and liabilities subject to the measurement requirements of IFRS 5 are expensed in the determination of profit or loss in the period of re-measurement. Similarly, a gain is recognised upon re-measurement to the extent that it is attributable to those assets and liabilities subject to the measurement requirements of IFRS 5 and it is not in excess of the cumulative impairment loss previously recognised in accordance with IAS 36 and IFRS 5.


Chapter 19:

Impairments and reversals of impairments are accounted for in the order established in IAS 36. These matters are set out in paragraph 20 to 25 of IFRS 5, some of which are illustrated in Example 10 of the Implementation Guidance issued therewith and the illustrative example set out below.

Illustrative example 19.7: Impairment of a disposal group On 15 May 20.6, the reporting entity appropriately classified its casino division, measured under the cost model, as a disposal group in accordance with IFRS 5. Details of the assets of the casino operation are as follows: Carrying

amount before classification

as held for sale

Original cost Fair value less costs to

sell on 15 May 20.6

Fair value less costs to

sell on 30 June 20.6

Fair value less costs to sell on

31 December 20.6

Rand Rand Rand Rand Rand Disposal group 40 000 220 000 37 000 34 000 36 000 Casino licence 20 000 100 000 Buildings (PPE) 12 000 40 000

Equipment 8 000 80 000

Expected costs to sell the disposal group are estimated to be 10% of the fair value of the disposal group. The reporting entity prepares interim financial statements for the six-month period ended 30 June. The disposal group was disposed of for R30 000 on 15 January 20.7 and R1 000 cost to sell were incurred in concluding the sale. Ignore all forms of taxation. Required: Prepare the journal entries necessary to record the assets of the casino division from immediately before their classification as non-current assets held for sale to their disposal. Solution: Calculation: Rand Accumulated amortisation – casino licence R100 000 cost – R20 000 carrying amount 80 000 Accumulated amortisation – buildings R40 000 cost – R12 000 carrying amount 28 000 Accumulated amortisation – equipment R80 000 cost – R8 000 carrying amount 72 000 Cost – casino licence Given (100 000) Cost – buildings Given (40 000) Cost – equipment Given (80 000) Disposal group held for sale – casino licence (R20 000/R40 000 x R37 000) 18 500 Disposal group held for sale – buildings (R12 000/R40 000 x R37 000) 11 100 Disposal group held for sale – equipment (R8 000/R40 000 x R37 000) 7 400 Impairment loss (P/L) Balancing figure 3 000 15 May 20.6 Reclassification as held for sale Impairment loss (P/L) Balancing figure 3 000 Disposal group held for sale – casino licence R18 500(above) – (R18 500/R37 000 x R34 000) (1 500) Disposal group held for sale – buildings R11 100(above) – (R11 100/R37 000 x R34 000) ( 900) Disposal group held for sale – equipment R7 400(above) – (R7 400/R37 000 x R34 000) ( 600) 30 June 20.6 re-measurement of disposal group classified as held for sale


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Calculation: Rand Disposal group held for sale - casino licence R18 500 – R1 500(above) – (R17 000/R34 000 x

R36 000) 1 000

Disposal group held for sale – buildings R11 100 – R900(above) – (R10 200/R34 000 x R36 000)

600

Disposal group held for sale – equipment R7 400 – R600(above) – (R6 800/R34 000 x R36 000) 400 Impairment loss reversal (P/L) Balancing figure (2 000) 31 December 20.6 Reversal of prior period impairment

Loss on disposal (P/L) Balancing figure 7 000 Bank/Receivable Proceeds from disposal 30 000 Disposal group held for sale - casino licence R18 500 – R1 500 + R1 000 (above)/R36 000 x

R36 000 (18 000)

Disposal group held for sale - buildings R 11 100 – R900 + R600(above)/R36 000 x R36 000 (10 800) Disposal group held for sale - equipment R7 400 – R600 + R400(above)/R36 000 x R36 000 (7 200) Bank/Other payables Disposal costs (1 000) 15 January 20.7 Disposal

7.3 Changes to a plan of sale If an entity has correctly classified an asset (or disposal group) as held for sale, but the criteria for such a classification are no longer met, the entity shall (paragraph 26) cease to classify the asset (or disposal group) as held for sale. In this situation, the entity shall (paragraph 27) measure a non-current asset that ceases to be classified as held for sale at the lower of its:

• carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluation that would have been recognised had the asset (or disposal group) not been classified as held for sale, and

• recoverable amount at the date of the subsequent decision not to sell. (If the asset is part of a cash-generating unit, its recoverable amount is the carrying amount that would have been recognised after the allocation of any impairment loss arising on that cash-generating unit under IAS 36).

The underlying principle is to restore the carrying amount of the asset to what it would have been had it never been classified as held for sale. If an entity removes an individual asset or liability from a disposal group held for sale, the remaining assets and liabilities from a disposal group to be sold shall continue to be measured as a group, only if the group meets the relevant criteria to be classified as held for sale. Otherwise, the remaining non-current assets of the group that individually meet the criteria to be classified as held for sale, shall be measured at the lower of their carrying amounts and fair values less costs to sell at that date. Any non-current assets that do not meet the criteria shall cease to be classified as held for sale (paragraph 29).


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Illustrative example 19.8: Change to a plan of sale A Limited is committed to disposing the plant of its XXX cash-generating unit. At 30 June 20.3, all criteria are met for the non-current asset to be classified as held for sale. On 31 December 20.3, the plant ceases to meet all the necessary criteria for classification as ‘held for sale’. Plant is carried under the cost model. Details of the plant of the XXX cash-generating unit are as follows: R’000 Cost - acquired 1 January 20.1 1 000 Depreciation rate (straight-line to nil residual value) 10% At 30 June 20.3: Fair value 700 Costs to sell 20 At 31 December 20.3: Recoverable amount

• Scenario 1 720 • Scenario 2 690

Required: Prepare the journal entries (ignoring taxation) to record the recognition and derecognition of the non-current assets as held for sale for the year ended 31 December 20.3. The company operates a single plant account (i.e. you are not required to differentiate between the gross carrying amount and accumulated depreciation and accumulated impairment). Solution: ( ) = credit Calculation: Scenario 1 Scenario 2 R’000 R’000 30 June 20.3 Depreciation (P/L) 6/12 months x 10% x R1000 000 cost 50 50 Plant (50) (50) Depreciation for 6 months Impairment loss (P/L) (R1 000 000 x 7.5/10 years) – (R700 000 fair

value – R20 000 costs to sell = R680 000) 70 70

Plant (70) (70) Reclassified as ‘held for sale’ 31 December 20.3 Plant

{R1 000 000 x 7/10 years) – R680 000 old);(R690 000 recoverable amount –

R680 000 old).

20

10

Impairment loss (P/L) (20) (10) Reclassification of asset ‘held for sale’ to property, plant and equipment

Explanation: Measure the asset at the lower of adjusted carrying amount (R700 000) (see para 27) and its recoverable amount i.e. R720 000 (scenario 1) and R690 000 (scenario 2); choose the lower and then compare to the current carrying amount.


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8. PRESENTATION AND DISCLOSURE Statement of financial position disclosure (paragraphs 38, 39 and 40): IFRS 5 requires that an entity present:

• a non-current asset classified as held for sale and the assets of a disposal group classified as held for sale separately from the other assets in the statement of financial position;

• the liabilities of a disposal group classified as held for sale separately from other liabilities in the statement of financial position;

• the major classes of assets and liabilities classified as held for sale separately disclosed either on the face of the statement of financial position or in the notes to the financial statements (an exception is if the disposal group is a newly acquired subsidiary that meets the criteria to be classified as held for sale on acquisition, then disclosure of the major classes of assets and liabilities is not required); and

• separately any cumulative income and expense recognised directly in equity relating to a non-current asset (or disposal group) classified as held for sale.

The assets and liabilities shall not be offset and presented as a single amount. An entity is not required to re-classify or re-present amounts presented for non-current assets or the assets and liabilities of disposal groups classified as held for sale in the statements of financial position for prior periods to reflect the classification in the statement of financial position for the latest period presented. Additional disclosures (paragraphs 41 and 42): The following disclosures shall be made in the notes in the period in which a non-current asset (or disposal group) classified as held for sale has either been classified as held for sale or sold:

• a description of the non-current asset or disposal group; • a description of the facts and circumstances of the sale, or leading to the expected disposal,

and the expected manner and timing of that disposal; • the gain or loss recognised in accordance with IFRS 5 (i.e. impairment losses and reversals)

and, if not separately presented on the face of the income statement, the caption in the income statement that includes that gain or loss; and

• if applicable, the segment in which the non-current asset (or disposal group) is presented under IFRS 8 Operating Segments.

Gains or losses on continuing operations (paragraphs 37 and 42): Any gain or loss on the re-measurement of a non-current asset (or disposal group), that does not meet the definition of a component of an entity, shall be included in the profit or loss from continuing operations. If an entity has classified an asset (or disposal group) as held for sale, but the criteria for such classification are no longer met, or an entity removes an individual asset or liability from a disposal group, then, an entity shall disclose in the notes to the financial statements that include the period of the decision to change the plan to sell the non-current asset (or disposal group), a description of the facts and circumstances leading to the decision and the effect of the decision on the results of operations for the period and any prior periods presented. 9. SUMMARY IFRS 5 sets out the requirements for classification, measurement and presentation of non-current assets held for sale. It has achieved some convergence with the Financial Accounting Standard Board’s comparable standard although the impairment of long-lived assets to be held and used is an area where there is still considerable divergence and thus developments may be seen in the future in that area.

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