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, IFRS 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. IFRS 5 came into effect on 1 January 2005.
Objective of IFRS 5
IFRS 5 focuses on two main areas:
- It specifies the accounting treatment for assets (or disposal groups) held for sale, and
- It sets the presentation and disclosure requirements for discontinued operations.
A non-current asset must be classified as held for sale if most of its carrying amount is expected to be recovered via future cash flows from the sale of the asset rather than future cash flows from use. IFRS 5 will not apply to a non-current asset that is going to be abandoned, as the carrying amount of an abandoned asset will be recovered through future use.
To classify an asset as held for sale, the asset or disposal group must be available for immediate sale in its present condition and the sale must be highly probable. IFRS 5 sets out criteria for the sale to be highly probable:
- Management must be committed to a plan to sell the asset;
- An active program to find a buyer must be initiated;
- The asset must be actively marketed for sale at a price that is reasonable to its current fair value;
- The sale must be completed within one year from the date of classification;
- Significant changes to be made to the plan must be unlikely.
Immediately before the asset is classified as held for sale, it should be measured under its applicable IFRS. Subsequently, after it has been classified as held for sale it must be measured at the lower of its carrying amount or fair value less costs to sell. However, IFRS 5 lists a few measurement exceptions:
- Deferred tax assets (IAS 12 Deferred Tax)
- Assets arising from employee benefits (IAS 19 Employee Benefits)
- Financial assets within the scope of IFRS 9 Financial Instruments
- Non-current assets that are accounted for under the fair value model in IAS 40 Investment Property
- Non-current assets that are measured at fair value less costs to sell in accordance with IAS 41 Agriculture
- Contractual rights under insurance contracts as defined in IFRS 4 Insurance Contracts.
If any of the above assets are classified as held for sale, they must be measured under the same accounting policy as before the classification. Although the accounting treatment of these assets does not change, they must be presented separately from other assets and they require additional disclosure.
A discontinued operation is a component of an entity that has 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 plan to dispose of, or
- Is a subsidiary acquired solely with a view to resale.
IFRS 5 requires discontinued operations to be presented separately in the financial statements to keep the readers of the financial statements informed about those operations the entity has discontinued, and those operations the entity is continuing with in order to generate future profits and cash flows.
IFRS 5 requires discontinued operations to be presented as follows:
1. In the statement of profit and loss and other comprehensive income: a single amount comprising the total of:
- The post-tax profit or loss of the discontinued operation,
- The post-tax gain or loss recognised on the measurement to fair value less costs to sell, and
- The post-tax gain or loss recognised on the disposal of assets or the disposal group making up the discontinued operation.
The analysis of the single amount can be presented in the notes or on the face of the statement of profit or loss and other comprehensive income.
2. In the statement of cash flows: the net cash flow attributable to the operating, investing and financing activities of discontinued operations
In the statement of financial position: non-current assets of a disposal group must be presented separately from other assets. The same applies for liabilities of a disposal group classified as held for sale.
Trainee Accountant, Durban
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