IFRS 5 Non-current Assets Held for Sale and Discontinued Operations - Summary

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS Summaries by Imad Uddin, FRM

Objective of IFRS 5

To specify the accounting for:

Non-current assets (or disposal groups) held for sale.

The presentation and disclosure of discontinued operations.

Aims to ensure that financial statements provide relevant information about assets an entity intends to dispose of and operations it has discontinued or is discontinuing.

Scope

The classification and presentation requirements of IFRS 5 apply to all recognized non-current assets and to all disposal groups of an entity.

The measurement requirements apply to all recognized non-current assets and disposal groups, except for those assets listed below which continue to be measured under their respective standards even when part of a disposal group:

Deferred tax assets (IAS 12).

Assets arising from employee benefits (IAS 19).

Financial assets within the scope of IFRS 9.

Non-current assets accounted for under the fair value model in IAS 40 Investment Property.

Non-current assets measured at fair value less costs to sell in accordance with IAS 41 Agriculture.

Contractual rights under insurance contracts as defined in IFRS 17.

Key Definitions

Term	Definition
Non-current Asset Held for Sale	A non-current asset (or disposal group) whose carrying amount will be recovered principally through a sale transaction rather than through continuing use.
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. The group includes goodwill acquired in a business combination if it is part of a CGU to which the disposal group belongs.
Discontinued Operation	A component of an entity that either has been disposed of, or is classified as held for sale, AND: (a) Represents a separate major line of business or geographical area of operations; (b) Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area; OR (c) Is a subsidiary acquired exclusively with a view to resale.
Costs to Sell	Incremental costs directly attributable to the disposal of an asset (or disposal group), excluding finance costs and income tax expense.

Classification Criteria for Held for Sale

A non-current asset (or disposal group) is classified as held for sale if, and only if, ALL the following criteria are met:

The asset/disposal group must be available for immediate sale in its present condition, subject only to terms that are usual and customary.

Its sale must be highly probable. For sale to be highly probable:

Management must be committed to a plan to sell the asset/disposal group.

An active programme to locate a buyer and complete the plan must have been initiated.

The asset/disposal group must be actively marketed for sale at a price that is reasonable in relation to its current fair value.

The sale should be expected to qualify for recognition as a completed sale within one year from the date of classification (subject to limited exceptions).

Actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Measurement

Upon Classification as Held for Sale (Initial Measurement under IFRS 5):

Measure a non-current asset (or disposal group) classified as held for sale at the LOWER of:

Its carrying amount (just before classification as held for sale); AND

Its fair value less costs to sell.

Key Notes on Measurement:

Cease depreciation/amortization on non-current assets once classified as held for sale.

For a disposal group, the measurement applies to the group as a whole. Any impairment loss is allocated first to goodwill, then pro-rata to other non-current assets in scope of IFRS 5 measurement.

Any impairment loss arising from the initial write-down to fair value less costs to sell is recognized in profit or loss.

Subsequent increases in fair value less costs to sell can be recognized as a gain, but only up to the cumulative impairment loss previously recognized (either under IFRS 5 or IAS 36 prior to classification). This gain is recognized in P&L. Goodwill impairment cannot be reversed.

Subsequent Changes to Classification

If Criteria for Held for Sale No Longer Met:

The asset/disposal group ceases to be classified as held for sale and is reclassified back to its original category (e.g., PPE under IAS 16).

Measure the non-current asset at the LOWER of:

Its carrying amount before it was classified as held for sale, adjusted for any depreciation, amortization or revaluations that would have been recognized had it not been classified as held for sale; AND

Its recoverable amount (per IAS 36) at the date of the decision not to sell.

Any adjustment is recognized in profit or loss.

Extension of Sale Period Beyond One Year:

Continued classification as held for sale is permitted if the delay is caused by events or circumstances beyond the entity's control, AND there is sufficient evidence that the entity remains committed to its plan to sell.

Discontinued Operations – Presentation

A discontinued operation is a component that has been disposed of or is classified as held for sale, representing a separate major line of business or geographical area.

Income Statement Treatment:

Present a single amount on the face of the statement of comprehensive income comprising the total of:

The post-tax profit or loss of discontinued operations; AND

The post-tax 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.

An analysis of this single amount is presented in the notes or on the face of the income statement.

Comparative Periods:

The results of discontinued operations must be re-presented for prior periods shown in the financial statements, so that the disclosures relate to all operations that have been discontinued by the end of the reporting period for the latest period presented.

Additional Disclosures (Analysis of the Single Amount):

Item	Description
Revenue, Expenses, Pre-tax Profit	The revenue, expenses, and pre-tax profit or loss of discontinued operations.
Related Income Tax Expense	The related income tax expense as required by IAS 12.
Gain/Loss on Measurement/Disposal	The gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets/disposal group(s), and the related income tax expense.
Cash Flows	Net cash flows attributable to the operating, investing, and financing activities of discontinued operations (disclosed in notes or on face of cash flow statement).
Description	Description of the facts and circumstances of the sale or expected disposal.
Nature & Timing	Nature of assets/liabilities in a disposal group held for sale and expected timing of disposal.

Disclosures for Held-for-Sale Assets (Not Discontinued Operations)

Description of the non-current asset or disposal group.

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 recognized on initial measurement to FV less costs to sell, and if not presented separately on the face of the income statement, the line item that includes it.

If applicable, the reportable segment in which the non-current asset (or disposal group) is presented in accordance with IFRS 8.

If reclassified back from held for sale: Description of facts and circumstances leading to decision not to sell, and effect on results.

Example – Held for Sale Classification & Measurement

Scenario:

An entity decides to sell a building. Criteria for "held for sale" are met on Dec 31, Year 1.

Carrying amount of building (IAS 16) at Dec 31, Year 1: $1,200,000.

Estimated Fair Value at Dec 31, Year 1: $1,100,000.

Estimated Costs to Sell: $50,000.

Calculation:

Fair Value Less Costs to Sell = $1,100,000 - $50,000 = $1,050,000.

Lower of Carrying Amount ($1,200,000) and FV less Costs to Sell ($1,050,000) is $1,050,000.

Impairment Loss = $1,200,000 - $1,050,000 = $150,000.

Journal Entry at Dec 31, Year 1:

Dr. Impairment Loss (Profit or Loss) $150,000

Dr. Asset Held for Sale $1,050,000

Cr. Building (original asset account) $1,200,000

No depreciation is charged on the building after Dec 31, Year 1 while it remains classified as held for sale.

Key Judgments

Determining whether the criteria for "held for sale" classification are met, particularly assessing if the sale is highly probable and the asset is available for immediate sale.

Estimating fair value less costs to sell.

Identifying a component of an entity and determining if its disposal qualifies as a discontinued operation.

Assessing whether the one-year period for sale completion can be extended due to events beyond the entity's control.

Typical Scenarios & Treatment

Situation	Likely Treatment under IFRS 5
Plan to sell a factory building	Classify as "Held for Sale" if all criteria met (immediate sale, highly probable, etc.). Measure at lower of CA and FV-CTS. Stop depreciation.
Closure & sale of an entire major product line	Likely a "Discontinued Operation". Results presented separately. Assets/liabilities of the line become a "Disposal Group Held for Sale".
Investment property measured at Fair Value (IAS 40)	Continues to be measured at Fair Value under IAS 40. IFRS 5 measurement rules do not apply. Disclosures under IFRS 5 may still be needed if it's part of a discontinued operation.
Subsidiary acquired exclusively with a view to resale	Classified as "Held for Sale" from acquisition (if criteria met within short period, e.g. 3 months). Also qualifies as a "Discontinued Operation".

Common Pitfalls

Continuing to depreciate/amortize an asset after it has been classified as held for sale.

Incorrectly classifying an asset as held for sale when the "highly probable" sale criterion is not genuinely met (e.g., no active marketing, unrealistic price).

Failing to identify and measure a "disposal group" correctly when multiple assets and liabilities are to be sold together.

Misclassifying a significant restructuring or closure that does not meet the definition of a "discontinued operation" (e.g., not a separate major line of business).

Incorrectly accounting for reversals of impairment losses on assets held for sale (limitations apply).

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