IFRS 9 Financial Instruments
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for Accounting Professionals
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IFRS 5 Non-current assets held for sale and discontinued operations 2013
IFRS WORKBOOKS
(1 million downloaded)
Welcome to the EU Tacis IFRS Workbooks sixth (2013) edition! This is the tenth anniversary of the first edition in 2003. The changes from the 2012 edition are minimal, with no new standard issued in the past year. Major changes are anticipated to IFRS 9, IFRS 4, IAS 17 and IAS 18. Exposure drafts (proposals) have been issued, but have not yet been incorporated into the standards. To the books, we have added an article: ‘IFRS- grabbing the tiger by the tail’ which has been published by bankir.ru in Russian. This article covers IFRS teaching issues for each standard and a number of opinions and discussion points.
The set of books provides a book for every standard, plus three books on consolidation. Financial instrument bookkeeping is covered in IAS 32/39 (book 3) and in IFRS 9. IFRS 7 is complemented by FINREP, which illustrates practical use and presentation formats. An introduction to IFRS and transformation models from Russian accounting to IFRS complete the set.
Each workbook is a combination of Information, Examples, Self-Test Questions and Answers.
Thanks are due to those who made these publications possible and to you, our readers, for your continued support. I would like to express my gratitude to: Igor Sykharev and Tatiana Trifonova of the Ministry of Finance who provided a link from the Ministry’s site. Gulnara Makhmutova and Adel Valeev provided the updated Russian texts and editing. Marina Korf and Yulia Ykhanova of bankir.ru provided help, advice and space on its website. Sergey Dorozhkov and Elina Buzina of Association of Russian Bankers’ Institute of Banking ran excellent IFRS courses on all standards which enabled us to test this material and learn new insights from them and the participants. Please join us there for the best consolidation course in Russia.
World Bank courses for the Bank of Tanzania (‘BOT’) provided new IFRS and banking insights: thanks to Albert Mkenda BOT and my colleague Benson Mahenya among many others. IFRS assistance to the Bank of Mongolia (‘BOM’) with PricewaterhouseCoopers (thanks to Ekaterina Nekrasova, Jelena Pesic and Vladislav Kononenko) provided exposure to Mongolian commercial bank reporting and blending IFRS with bank prudential ratios. Oyungerel Gonchig, Project Manager at World Bank, Mongolia, and our counterparts at BOM: Oyuntsatsral Banid, Bunchinsuren Dagva, Borkhuu Gotovsuren, Batmaa Ochirbat and Gantsetseg Myagmarjay contributed to a memorable project.
On the back page are notes covering copyright details and the history of the series.
Please tell your friends and colleagues where to find our books. We hope that you find them useful.
Robin Joyce
Professor of the Chair of International Banking and Finance,
Financial University under the Government of the Russian Federation
Professor, Russian Academy of National Economy and Public
Administration under the President of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2013
CONTENTS
1. Non-current Assets ‘held for sale’ and Discontinued Operations – Introduction 3
2. IFRS 5 - Impact for Banks 5
3. Classification of Non-Current Assets or Disposal Groups as ‘Held for Sale’ 11
4. Measurement of Non-Current Assets or Disposal Groups Classified as ‘Held for Sale’ 13
5. Discontinued operations 18
6. Presentation and Disclosure 19
7. Multiple Choice Questions 23
8. Answers to Multiple Choice Questions 26
1. Non-current Assets ‘held for sale’ and Discontinued Operations - Introduction
OVERVIEW
Aim
The aim of this workbook is to assist the individual in understanding IFRS 5 Non-current Assets ‘held for sale’ and Discontinued Operations according to IFRS.
Reasons for issuing IFRS 5
Separately highlighting the results of discontinued operations provides users with information that is relevant in assessing the ongoing ability of the bank to generate cash flows.
Providing information about assets and groups of assets and liabilities to be disposed of is also of benefit to users. Such information should assist them in assessing the timing, amount and uncertainty of future cash flows.
Having ownership of an asset, its value is recovered by use, or by resale, or both.
Whilst awaiting disposal, an asset may be in current use by the bank.
If an asset is available for immediate sale, the remaining use of the asset is incidental to its recovery through sale and the carrying amount of the asset will be recovered principally through sale.
A distinction is drawn between an asset that is to be sold and an asset that is to be abandoned, because the former will be recovered principally through sale and the latter (an asset that is to be abandoned) through its continuing use.
IFRS 5 sets out requirements for the classification, measurement and presentation of non-current assets ‘held for sale’.
IFRS 5 arises from the IASB’s consideration of the U.S. based FASB Statement No. 144 which addresses three areas:
i) the classification, measurement and presentation of assets ‘held for sale’;
ii) the classification and presentation of discontinued operations; and
iii) the impairment of long-lived assets to be held and used.
IFRS 5 achieves substantial convergence with the requirements of SFAS 144 relating to assets ‘held for sale’, the timing of the classification of operations as discontinued and the presentation of such operations but not (iii) impairment of long-lived assets (see IAS 36 workbook).
Main features of IFRS 5
IFRS 5:
1. uses the classification ‘‘held for sale’’.
2. introduces the concept of a ‘disposal group’, being a group of net assets (assets and liabilities) to be disposed of, together as a group, in a single transaction.
3. specifies that assets or disposal groups that are ‘held for sale’ are carried at the lower of:
carrying amount and
‘fair value, less costs to sell’.
4. specifies that an asset classified as ‘held for sale’, or included within a disposal group that is ‘held for sale’, is not depreciated.
5. classifies an operation as discontinued at the date the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation.
6. specifies that ‘held for sale’ assets and the net assets included within a ‘held for sale’ disposal group, are presented separately, on the face of the balance sheet (SFP).
7. specifies that the results of discontinued operations are to be shown separately, on the face of the income statement.
8. prohibits retroactive classification of an operation as discontinued.
IFRS 5 classifies an operation as ‘discontinued’, at the date the operation can be classified as ‘held for sale’, or when the bank has disposed of the operation.
OBJECTIVE
The objective of IFRS 5 is to specify the accounting for assets ‘held for sale’ and the presentation and disclosure of discontinued operations. In particular, IFRS 5 requires:
i assets that meet the criteria are classified as ‘held for sale’ and measured at the lower of:
carrying amount and
‘fair value, less costs to sell’
and depreciation on such assets to cease;
ii assets that meet the criteria are classified as ‘held for sale’ are to be presented separately, on the face of the balance sheet. The results of discontinued operations are presented separately in the income statement.
2. IFRS 5 - Impact for Banks
IFRS 5 has a specific relevance to banks in being used to account for assets received in exchange for loans, when taking possession of collateral.
|EXAMPLE- taking possession of real estate due to loan default. |
| |
|You loan money to a firm building flats. The firm provides the land and the flats as collateral for the loan.|
|Due to fraud, the firm does not have enough money to complete the flats and is in breach of the conditions of|
|the loan. |
| |
|You take possession of the land and the flats. You intend to sell them, but need to complete construction in |
|order to recover the value of the loan and the unpaid interest. You account for them under IFRS 5 – |
|non-current assets held for sale. |
|EXAMPLE- Assets acquired in exchange for loans - HSBC plc Annual Report 2005. |
|Non-financial assets acquired in exchange for loans in order to achieve an orderly realisation are recorded |
|as assets held for sale and reported in ‘Other assets’. |
| |
|The asset acquired is recorded at the lower of its fair value (less costs to sell) and the carrying amount of|
|the loan (net of impairment allowance) at the date of exchange. No depreciation is provided in respect of |
|assets held for sale. |
| |
|Any subsequent write-down of the acquired asset to fair value less costs to sell is recorded as an impairment|
|loss and included in the income statement. Any subsequent increase in the fair value less costs to sell, to |
|the extent this does not exceed the cumulative impairment loss, is recognised in the income statement. |
This use of IFRS 5 is to distinguish activities (and the non-current assets involved) that are incidental to the bank’s main activity of banking, and are of a temporary nature. (If a bank is continuously involved in the construction industry, in a more active role than only making loans, these activities would be considered part of its normal trading.) The bank may then be subject to IAS 11.
|EXAMPLE- Disposal group - acquired with a view for subsequent disposal –HBOS plc 2006 financial statements. |
|The assets (1,388m) and liabilities (909m) of the disposal group comprise those of the Mother Topco Limited |
|group of companies. Mother Topco Limited, a subsidiary undertaking in which the Group had a 58.3% equity |
|interest at 31 December 2006, is the vehicle established to effect the purchase of McCarthy & Stone plc, a UK|
|provider of retirement homes. |
| |
|The assets and liabilities were acquired with a view for subsequent disposal. |
| |
|It is highly probable that this disposal will occur within twelve months of the acquisition date and, in |
|accordance with IFRS 5, 'Non-current assets held for sale and discontinued assets', the assets and |
|liabilities are classified as a disposal group. |
To qualify as assets held for sale under IFRS 5, the collateral that is being repossessed must be non-current assets and meet the IFRS 5 conditions detailed in this workbook. Otherwise, the assets will be shown as current assets and not distinguished, unless they comprise a disposal group (see below).
Financial instruments are measured as required by IFRS 9 and are outside the scope of the measurement provisions of IFRS 5.
|Example – Loans held for sale - Barclays plc 2006 financial statements. |
|Loans held for sale: Financial instruments are measured as required by IAS 39 (now IFRS 9) and are outside |
|the scope of the measurement provisions of IFRS 5. |
Non-current assets that have been used by the business, but are no longer needed by the business, may also be reclassified under IFRS 5 if they qualify:
|Example – disposal of property – HSBC plc 2006 financial statements. |
|“As a consequence of inviting proposals for a sale and leaseback of 8 Canada Square, London, under an |
|operating lease arrangement, the property has been reclassified as a non-current asset held for sale after 31|
|December 2006. |
| |
|This is in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. |
| |
|The reclassification was made at carrying value, with no financial impact on the income statement. At 31 |
|December 2006, the carrying amount of the property, included in ‘Property, plant and equipment’, was US$742 |
|million and the carrying amount of the long leasehold land, included in ‘Prepayments and accrued income’, was|
|US$210 million. |
| |
|The building and leasehold interest are included in the assets of the Europe geographical segment and the |
|‘Other’ customer group segment.” |
Banks will also use IFRS 5 for its discontinued operations:
|Example - Assets classified as held for sale and associated liabilities - Nationwide Annual Report And |
|Accounts 2007. |
| |
|On 7 February 2007 the Group announced the proposed sale of its life, investment and pensions subsidiaries, |
|Nationwide Life Limited and Nationwide Unit Trust Managers Limited to Legal & General. |
| |
|Consequently, the assets and liabilities of these undertakings are disclosed separately as required by IFRS |
|5. |
| |
|The proceeds of disposal are expected to exceed the carrying value of the related net assets and, |
|accordingly, no losses have been recognised. |
| |
|The major assets and liabilities of these undertakings are as follows: |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|Balance sheet (SFP) |
|2007 |
|2006 |
| |
| |
|£m |
|£m |
| |
|Assets |
| |
| |
| |
| |
|Loans and advances to banks |
|198.8 |
|- |
| |
|Insurance assets at fair value |
|1,909.6 |
|- |
| |
|Other assets |
|288.2 |
|- |
| |
|Total assets held for sale |
|2,396.6 |
|- |
| |
|Liabilities |
| |
| |
| |
| |
|Deposits from banks |
|875.0 |
|- |
| |
|Insurance contract liabilities |
|1,178.0 |
|- |
| |
|Other liabilities |
|37.7 |
|- |
| |
|Total liabilities directly associated with assets classified as held for sale |
|2,090.7 |
|- |
| |
In other cases, discontinued businesses may be considered not to be material and they are not shown separately, as in the following two examples:
|Example – Profit on sale and closure of businesses - Lloyds TSB Group 2006 financial statements. |
|“The businesses sold in 2005 were not material to the Group, and consequently they have not been treated as |
|discontinued operations.“ |
and
|Example – discontinued businesses– Barclays plc 2006 financial statements. |
|“Head office functions and other operations comprises discontinued businesses in transition.“ |
|Property type- different accounting treatment applied to properties under IFRS depending on their current and future uses and their ownership |
| |Standard |Standard Name |Valuation |
|Owner-occupied property |IAS 16 |Property, plant and equipment |Cost or revaluation. |
| | |(see also IAS 20 Government grants) | |
|Property acquired in an exchange of assets |IAS 16 |Property, plant and equipment |Fair value or the carrying amount of the assets traded / exchanged. |
|Investment property |IAS 40 |Investment property |Cost or fair value. |
|Investment property being redeveloped for continuing use |IAS 40 |Investment property |Cost or fair value. |
|as investment property. | | | |
|Investment property held for sale without development |IAS 40 |Investment property |Cost or fair value. |
|(unless it meets the criteria of IFRS 5 – see below). | | | |
|Property held under an operating lease classified as an |IAS 40 |Investment property |Fair value (accounted for as a finance lease under IAS 17). |
|investment property | | | |
|Property held under a finance lease |IAS 17 |Leases. Owner-occupied IAS 16, |The lower of fair value and the present value of the minimum lease |
| | |Investment property IAS 40. |payments. |
|Property held under an operating lease – owner -occupied |IAS 17 |Leases |Leasing costs expensed. |
|Property lease to another party under a finance lease |IAS 17 |Leases |Account receivable equal to the net investment in the lease. |
|Property sale and leaseback |IAS 17 |Leases |As operating lease or finance lease, as appropriate |
|Trading properties – property (including investment |IAS 2 |Inventories (Properties held for sale that meet the criteria of IFRS 5|Lower of cost and net realisable value. |
|property) intended for sale in the normal course of | |should be recorded according to IFRS 5 – see below. These are generally | |
|business or being built or developed for that purpose | |not in the normal course of business.) | |
|Property held for sale, or included in a disposal group |IFRS 5 |Non-current assets held for sale and discontinued operations |Lower of carrying amount and fair value less costs to sell. |
|that is held for sale. | | | |
|Assets received in exchange for loans (taking possession |IFRS 5 |Non-current assets held for sale and discontinued operations |Lower of fair value less costs to sell and carrying amount of the loan net|
|of collateral) | |Property, plant and equipment (see Property acquired in an exchange of |of impairment at the date of exchange. |
| |IAS 16 |assets above) |(see HSBC plc Annual Report 2005 page 247) |
|Property provided as part of a construction contract |IAS 11 |Construction contracts |Stage of contract completion or cost. |
|Future costs of dismantling, removal and site restoration.|IAS 37 |Provisions, contingent liabilities and contingent assets (see also IFRIC|Present value of the expected costs, using a pre-tax discount rate. |
| | |1, IFRIC 5) | |
|Notes to the table on the previous page. |
| |
|Note 1: Where an asset is revalued, increases in carrying amounts above cost are recorded as revaluation |
|surplus, in equity. |
|Using fair values, all changes in fair value are recorded in the income statement. |
|Reductions below cost are recorded in the income statement under both methods. |
| |
|Note 2. In the cases where the asset is subject to cost or revaluations, the carrying value will be |
|reduced by accumulated depreciation and accumulated impairment (see IAS 36 workbook). |
| |
|The table above identifies the different accounting treatment applied to properties under IFRS depending |
|on their current and future uses and their ownership. |
| |
|Workbooks are available on our website on each standard that explain each accounting treatment with |
|examples. |
The calculations and presentations of Non-current Assets ‘held for sale’ and Discontinued Operations are intended to help the reader of financial statements to distinguish between:
i) the results of activities that will continue to be part of the bank, and the assets and liabilities that support them, and
ii) the results of activities that have ceased (or will soon cease) to be part of the bank and the assets and liabilities that will no longer be part of the bank.
SCOPE
IFRS 5 is one of several standards that apply to property. The table above identifies IFRS 5 uses and valuations of property. In this context, IFRS 5 is close to IAS 2 (Inventories).
IAS 2 is used when trading properties is the main business of a bank, and the properties are being sold in the normal course of business.
IFRS 5 is used when the sale of property is not the main business. In the case of financial institutions, their normal business is to provide loans, though in some cases, the bank will receive assets that were collateral for the loans.
IFRS 5 applies to all non-current assets and to all disposal groups, except for those assets listed below, which continue to be measured in accordance with the Standard noted.
Sometimes, a bank disposes of a group of net assets in a single transaction. This is known as a disposal group. A disposal group that was part of a cash-generating unit becomes a separate cash-generating unit.
The group may include current assets, current liabilities and assets excluded from the requirements of IFRS 5.
If a non-current asset is part of a disposal group, IFRS 5 applies to the group as a whole. The group is measured at the lower of:
- its carrying amount; and
-‘fair value, less costs to sell’.
IFRS 5 does not apply to the following assets, which are covered by the Standards listed, either as individual assets or as part of a disposal group:
i deferred tax assets - IAS 12 Income Taxes.
ii assets arising from employee benefits - IAS 19 Staff Benefits.
iii financial assets within the scope of IFRS 9 Financial Instruments.
iv non-current assets, that use the fair value model in IAS 40 Investment Property (see Table above).
v non-current assets, that are measured at ‘fair value, less costs to sell’, in accordance with IAS 41 Agriculture.
vi contractual rights under insurance contracts as defined in IFRS 4 Insurance Contracts.
Defined terms
|cash-generating unit |The smallest identifiable group of assets that generates cash|
| |inflows, independent of the cash inflows from other assets. |
|component of a bank |Operations and cash flows that can be clearly distinguished |
| |operationally and for financial reporting, from the rest of |
| |the bank. |
|costs to sell |The incremental costs, directly attributable to the disposal |
| |of an asset or disposal group, excluding finance costs and |
| |income tax expense. |
|current asset |An asset that satisfies any of the following criteria: |
| |i it is expected to be realised in cash or is intended for |
| |sale or consumption in the bank’s normal operating cycle; |
| | |
| |ii it is held for the purpose of being traded; |
| | |
| |iii it is expected to be realised within twelve months after|
| |the balance sheet date; or |
| | |
| |iv it is cash or a cash equivalent asset that can be used |
| |within twelve months after the balance sheet date. |
|discontinued operation |A component of a bank that either has been disposed of, or is|
| |classified as ‘held for sale’ and: |
| |i represents a separate major line of business or |
| |geographical area of operations, |
| | |
| |ii is part of a single co-ordinated plan to dispose of a |
| |separate major line of business or geographical area of |
| |operations or |
| | |
| |iii is a subsidiary, acquired exclusively with a view to |
| |resale. |
|disposal group |A group of net assets to be disposed of by sale or otherwise |
| |together as a group, in a single transaction. It may include |
| |goodwill. |
|date of classification |Date of classification of long term assets or disposal group |
| |as held for sale. |
|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. (IFRS 13) |
|firm purchase commitment |An agreement with an unrelated party, binding on both |
| |parties, that specifies all significant terms, including the |
| |price and timing of the transactions and includes a |
| |disincentive for non-performance, that is sufficiently large |
| |to make performance highly probable. |
|highly probable |Significantly more likely than probable. |
|non-current asset |As asset that is not a current asset. |
|probable |More likely than not. |
|recoverable amount |The higher of an asset’s ‘fair value, less costs to sell’ and|
| |its value in use. |
|value in use |The present value of cash flows from the continuing use of an|
| |asset and from its disposal. |
3. Classification of Non-Current Assets or Disposal Groups as ‘Held for Sale’
1. Non-current assets or disposal groups are classified as ‘held for sale’, if their carrying amount will be recovered through a sale transaction.
A demerger where the shares are given to the group’s shareholders does not qualify as a sale. (However, it may be a discontinued operation from the date of demerger.)
EXAMPLE- carrying amount will be recovered through a sale transaction.
You decide to sell a computer. Its carrying value will be matched by sale proceeds, rather than service within your bank. Future cash flows will come from the sale of the computer rather than from operations.
2. The asset or disposal group must be available for immediate sale in its present condition and its sale must be highly probable.
EXAMPLE- available for immediate sale.
You wish to sell some mining equipment acquired as collateral that is in a disused mine. To be available for immediate sale, if will have to be brought to the surface.
3. The management must be committed to a plan to sell the asset or disposal group and have an active programme to locate a buyer.
4. The asset or disposal group must be actively marketed for sale.
EXAMPLE- plan to sell the asset.
Your board has decided to sell a division. Consultants have been hired to provide a sales plan. The division is not yet ‘held for sale’ as there is no plan to which management can be committed, nor is there any marketing.
5. The sale should be expected to be completed within one year from the date of classification. It should be unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Circumstances may extend the period to complete the sale beyond one year.
EXAMPLE- completed within one year.
Your board has decided to sell a division. Markets are depressed and the division will only be sold when a minimum price is secured. The division is not yet ‘held for sale’ as no time commitment has been made.
6. Sale transactions include exchanges of non-current assets for other non-current assets.
EXAMPLE-exchanges.
You are buying a computer and plan to offer a computer, in part exchange. The old computer can be ‘held for sale’.
7. The held for sale criteria must be met at the balance sheet date, not after.
If the criteria are met after the balance sheet date, but before the approval of the financial statements for issue, the information should be included in the notes.
EXAMPLE-decision after the balance sheet date.
Your year ends in December. You decide so sell a division in the following January. Your financial statements are approved in March. You do not change your classifications, but disclose the information in the notes (see IAS 10 workbook).
As a result of an acquisition, a bank acquires a non-current asset or disposal group exclusively with a view to its subsequent disposal. (Normally only part of an acquisition will be sold.)
It shall classify the non-current asset, or disposal group, as ‘held for sale’ at the acquisition date, only if the one-year requirement is met.
EXAMPLE- acquisition with a view to its subsequent disposal.
You buy a competitor’s global business. You will keep the Russian business but will sell its operations in Africa. The African operations are acquired as part of the overall purchase with a view to its subsequent disposal. They may be ‘held for sale’.
Non-current assets that are to be abandoned
A non-current asset or disposal group to be abandoned are not classified as ‘held for sale’. Its carrying amount will be recovered through continuing use.
EXAMPLE-abandoned asset.
A client owns a mine. When the minerals are exhausted, the client will abandon the mine. All income will come from the minerals. It is not ‘held for sale’.
Although an abandoned asset (or one that will be abandoned in the future) will not be ‘held for sale’, it may form a disposal group and a discontinued operation at the date it ceases to be used.
If the disposal group to be abandoned:
i represents a separate major line of business or geographical area of operations,
ii is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or
iii is a subsidiary, acquired exclusively with a view to resale,
the results and cash flows of the disposal group are represented as ‘discontinued operations’ at the date on which it ceases to be used.
EXAMPLE- abandoned group.
As part of a sale of a division, one operation will be closed, with no assets sold outside the group. This operation will not be ‘held for sale’, but it will be part of ‘discontinued operations’.
Non-current assets to be abandoned are those to be used to the end of their economic life and those that are to be scrapped, or closed, rather than sold.
A non-current asset which has been temporarily taken out of use has not been abandoned.
4. Measurement of Non-Current Assets or Disposal Groups Classified as ‘Held for Sale’
Measurement of a non-current asset or disposal group
Non-current assets and disposal groups classified as ‘held for sale’ are measured at the lower of its:
-carrying amount; and
-‘fair value, less costs to sell’.
EXAMPLE- lower of its carrying amount and ‘fair value, less costs to sell’.
The carrying amount of your computer is 100. You will sell it, but the net proceeds will only be 90. Its value should be reduced to 90.
If newly acquired assets, or a disposal group, are ‘held for sale’, they will be measured at the lower of cost and ‘fair value, less costs to sell’.
EXAMPLE- lower of cost and ‘fair value, less costs to sell’.
You buy a group of cash machines. One machine costs you 150, but you will resell it for 180.
You value the machine at 150
If the asset or disposal group is acquired as part of a business combination, it shall be measured at ‘fair value, less costs to sell’, Cost = fair value, as calculated in a combination, and therefore cost can be used in place of fair value in such a case (see IFRS 3 workbook).
EXAMPLE- asset from business combination- ‘fair value, less costs to sell’.
You buy a group of businesses. You will sell one. It cost 130, as part of the purchase. The selling price will be also 130. Sale costs will be 10, so ‘fair value, less costs to sell’ will be 120 (130-10).
When the sale is expected to occur beyond one year, the costs to sell are measured at present value.
Any increase in the present value of the costs to sell that arises from the passage of time is recorded as a financing cost.
Immediately before the initial classification of the asset or disposal group, as ‘held for sale’, the carrying amounts are measured in accordance with applicable IFRS’s.
EXAMPLE-review of carrying amounts before the initial classification.
You are about to sell a division. Investment property is included. You have revalued it before. It should be revalued again before it is classifying it as ‘held for sale’ (see IAS 40 workbook).
On subsequent re-measurement of a disposal group, the carrying amounts of any assets and liabilities that are outside IFRS 5, will be reviewed before the ‘fair value, less costs to sell’ of the disposal group is remeasured.
Thus, inventory, accounts receivable, finance leases and current liabilities will all be brought up to date before the remeasurement.
EXAMPLE-review of carrying amounts of assets outside IFRS 5.
In the disposal group are inventory and accounts receivable. Provisions for obsolete inventory and doubtful debts should be reviewed before the disposal group’s ‘fair value, less costs to sell’ is remeasured.
Recognition of impairment losses and reversals
Impairment losses are recorded for any initial or subsequent write-down of the asset, or disposal group, to ‘fair value, less costs to sell’.
Subsequent increase in ‘fair value, less costs to sell’ are recorded as a gain up to a limit of the cumulative impairment recorded in accordance with IFRS 5,
or IAS 36.
EXAMPLE-reversal of impairment loss.
Your building has a carrying value of 100. In year 1 you have an impairment loss of 10, so you reduce the carrying value to 90. You decide to sell it and the
‘fair value, less costs to sell’ is 105.
You can only increase the value to 100, as this is reversing the impact of the impairment loss. No higher amount can be used.
The impairment loss or any subsequent gain recorded for a disposal group shall reduce, or increase, the carrying amount of only the non-current assets within the group.
EXAMPLE- impairment loss-disposal group.
The ‘fair value, less costs to sell’ of a disposal group falls by 50. The group contains current assets and non-current assets. The loss must be applied to the non-current assets.
A gain or loss not previously recorded, by the date of the sale of a non-current asset, or disposal group, shall be recorded at the date of derecognition (when it is written out of the balance sheet). This may occur if you have valued an asset anticipating that it will be sold, and then find that you will be unable to sell it.
EXAMPLE- loss not previously recorded.
In your disposal group, there is an asset worth 60. The buyer refuses to buy this asset, which is then sold for scrap, for 5. The 55 reduction in value shall be recorded at the date of sale of the disposal group.
Requirements relating to derecognition (when it is written out of the balance sheet) are set out in:
i IAS 16 for property, plant and equipment and
ii IAS 38 for intangible assets.
Non-current assets are not depreciated nor amortised while classified as ‘held for sale’. Their value is remeasured at the end of each period (the lower of:
its carrying amount and ‘fair value, less costs to sell’) and any impairment is recorded.
The main reason that they are neither depreciated nor amortised is that their carrying amounts are to be realised in sale proceeds, not in the bank’s continuing operations.
EXAMPLE- not depreciate a non-current asset, classified as ‘held for sale’ - 1
You have created a ‘held for sale’ disposal group. It is valued at ‘fair value, less costs to sell’. You stop all depreciation of non-current assets from the moment it is classified as ‘held for sale’.
|EXAMPLE- not depreciate a non-current asset, classified as ‘held for sale’ – 2 |
|Depreciation of an asset begins when it is available for use. That is when the asset is in the location |
|and condition necessary for it to be capable of operating in the manner intended by management. |
| |
|Depreciation of an asset ceases at the earlier of when the asset is classified as held for sale or is when|
|the asset is derecognised [IAS16]. |
| |
|Question |
|Should management continue to provide depreciation when a factory is held for sale? |
| |
|Background |
|A client owns several factories. Management decides to close one of them and classify it as held for sale |
|because of a fall in demand for one of the product lines. The criteria for this factory to be classified |
|as held for sale are met for this factory. |
| |
|Management provides depreciation on the factory using the straight-line method. |
| |
|Solution |
|No, management should not continue to provide depreciation on the factory. It is classified as held for |
|sale in accordance with IFRS 5. |
Interest and other expenses attributable to the liabilities of a disposal group classified as ‘held for sale’ shall continue to be recorded.
EXAMPLE- Interest attributable to the liabilities of a disposal group classified as ‘held for sale’ shall continue to be recorded.
Your disposal group includes interest charges from leased equipment. This is charged to the disposal group.
Changes to a plan of sale
Assets classified as ‘held for sale’ cease to be classified if the criteria are no longer met.
EXAMPLE-no longer ‘held for sale’.
You try to sell your insurance division. After 6 months (in July), you take it off the market.
From July, it is no longer classified as ‘held for sale’.
Non-current assets that cease to be classified as ‘held for sale’ are measured at the lower of:
i carrying amount before the assets or disposal group was classified as ‘held for sale’.
This is adjusted for any depreciation, amortisation or revaluations that would have been recorded, had the asset or disposal group not been classified as ‘held for sale’
EXAMPLE-no longer ‘held for sale’ valuation 1.
The value of your disposal group is 1.000.
If it had not been held for sale, it would have depreciated by 50.
Depreciation is not charged while assets are ‘held for sale’.
It ceases to be ‘held for sale’. The additional depreciation of 50 must now be charged.
The revised valuation will be 950 (1000-50).
ii recoverable amount at the date of the subsequent decision not to sell.
EXAMPLE-no longer ‘held for sale’ valuation 2.
The valuation of the disposal group is 950 (see part 1 above).
Having decided not to sell the division, its assets will be merged with another division though some will be scrapped.
The assets that will be transferred will total 800. Those that will be scrapped will earn 20.
The recoverable amount will be 820 (800+20).
As this is lower than the valuation of the disposal group, it will be used as the new measurement. The loss of 130 (950-830) will be accounted for as a loss on disposal of the scrapped items.
If the non-current asset is part of a cash-generating unit, its recoverable amount is the carrying amount after the allocation of any impairment loss under IAS 36.
EXAMPLE- impairment loss, arising on a cash-generating unit.
A cash generating unit suffers an impairment loss of 2.000, of which 150 is allocated to a non-current asset.
The non-current asset’s carrying value is 600,which is reduced to 450 (600-150) accounted for as additional depreciation to adjust for the impairment loss allocation.
An adjustment to the carrying amount of a non-current asset, that ceases to be classified as ‘held for sale’, is recorded as an expense against income from continuing operations in the period in which the criteria are no longer met.
EXAMPLE-no longer ‘held for sale’ adjustments 3.
The value of your disposal group is 3.000.
If it had not been held for sale, it would have generated 125 in additional depreciation. Depreciation is not charged while assets are ‘held for sale’.
If it ceases to be ‘held for sale’, the 125 will be charged to continuing operations.
If the asset had been revalued before classification as ‘held for sale’, the adjustment shall be treated as a revaluation increase or decrease.
EXAMPLE-no longer ‘held for sale’ adjustments 4.
Your asset was revalued from 1.400 to 1.600, when it became ‘held for sale’. The revaluation of 200 is credited to the revaluation reserve in equity. (See IAS 16 and IAS 38 workbooks.)
It will not be sold and ceases to be ‘held for sale’. It is revalued at 1525.
The 75 (1600-1525) reduction is treated as a revaluation decrease. This reduces the revaluation reserve in equity, but has no impact on the income statement.
If an individual asset or liability is removed from a ‘held for sale’ disposal group, the remaining net assets are measured as a group, only if the group meets the criteria.
EXAMPLE-no longer a disposal group.
You sell all non-current assets from your disposal group. The remaining current assets and liabilities are outside the scope of IFRS 5, and must be reclassified as continuing operations (they are not shown separately).
The disposal group has ceased to exist.
The remaining non-current assets of the group that individually meet the ‘held for sale’ criteria are measured individually at the lower of their carrying amounts and ‘fair values, less costs to sell’.
EXAMPLE-no longer a disposal group.
You sell most of the non-current assets from your disposal group on September 15th. The remaining “held for sale" current non-assets will be measured individually at the lower of their carrying amounts and ‘fair values, less costs to sell’, on September 15th.
Any non-current assets that do not meet the criteria cease to be classified as ‘held for sale’ and must be reclassified as continuing operations after the adjustments detailed above (they are not shown separately).
Any gain or loss on the remeasurement of a non-current asset (or disposal group) classified as held for sale that does not meet (or no longer meets) the definition of a discontinued operation shall be included in profit or loss from continuing operations.
Extension of the period required to complete a sale
An extension required to complete a sale does not preclude an asset or disposal group from being classified as ‘held for sale’.
The one-year limit may be extended in the following situations:
1 if there is a reasonable expectation that others (not the buyer) will impose conditions on the transfer of the asset or disposal group and
the actions necessary to respond to those conditions cannot be initiated, until after a firm purchase commitment is obtained and
ii a firm purchase commitment is highly probable within one year.
EXAMPLE-conditions imposed on the transfer.
You attempt to sell a foreign subsidiary. The foreign government blocks the sale, and refuses to recognise the new owners.
You know that it will take more than a year to resolve these bureaucratic issues, but no firm purchase commitment will be made until they are resolved.
For the one-year limit to be extended, there must be an expectation that a firm purchase commitment is highly probable within one year.
2 The firm purchase commitment includes conditions (buyer or others) that will extend the period required to complete the sale and:
i timely actions necessary to respond to the conditions have been taken and
ii a favourable resolution of the delaying factors is expected.
EXAMPLE-firm purchase commitment conditions
You sell a group of mines, obtained as collateral from a client who defaulted on a loan. The buyer insists on geological and environmental surveys that will take more than a year to complete. The sale will be delayed by this action.
3 The non-current asset or disposal group that is ‘held for sale’ remains unsold at the end the initial one-year period and
i during this period, the bank took action to respond to the change in circumstances,
ii the non-current asset or disposal group is being actively marketed at a reasonable price.
EXAMPLE-changes in circumstances
You have been trying to sell a division to a buyer. The buyer has been delaying the sale, as the buyer is having financial difficulties (unknown to you).
The buyer goes into liquidation after 10 months of negotiation. You actively market the sale of the division to new clients at a reasonable price, but are unable to secure the purchase within one year.
Exchange Differences
IAS 21 deals with the impact of foreign exchange differences and translation differences relating to IFRS 5 transactions (see IAS 21 workbook).
5. Discontinued operations
Many groups change their composition by acquisitions, disposals or both.
Discontinued operations highlight the material parts of groups that are to be (or have been) sold, exchanged, or demerged. Abandoned non-current assets and disposal groups may also be reported as discontinued operations, if they are material to the group’s results.
Users wish to distinguish between the parts of the group that will continue operationally and those parts that will be, or have been, eliminated from the group in order to forecast the profits and cash flows for future periods.
Material changes in the composition of the group may decrease (or increase) the risks of the group’s business.
Providing information about ‘held for sale’ assets and discontinued operations provides relevant information on which users can base decisions.
A discontinued operation is a component that either has been disposed of, or is classified as ‘held for sale’ and
i represents a separate major line of business or geographical area of operations;
ii is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
iii is a subsidiary, acquired exclusively with a view to resale.
Therefore, a discontinued operation may still be trading within the group on the date of the financial statements, but its disposal is imminent.
Discontinued operations may also include abandoned assets (see above) and represents a separate major line of business or geographical area of operations, even though they will not have been classed as ‘held for sale’ (as explained in the section on abandonment above).
|EXAMPLES– discontinued operations |
| |
|You decide to sell your branch network. It is classified as ‘held for sale’ following the necessary steps|
|to market it. As a separate major line of business, it will be classified and reported as a discontinued |
|operation, separately from continuing operations. |
| |
|You buy a Russian banking group which also has operations in the Ukraine. You decide at the time of |
|purchase of the group that the Ukraine operation will be sold, and commence marketing it. As a subsidiary|
|acquired exclusively with a view to resale, it will be classified and reported as a discontinued |
|operation, separately from continuing operations. |
6. Presentation and Disclosure
A bank shall present and disclose information that enables users to evaluate the financial effects of discontinued operations and disposals of non-current assets (or disposal groups).
Presenting discontinued operations
Disclosure
A bank shall disclose:
1 a single amount on the face of the income statement (statement of comprehensive income), comprising the total of:
i the post-tax profit of discontinued operations and
ii the post-tax gain or loss recorded 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.
2 an analysis of the single amount in 1(above) into:
i the revenue, expenses and pre-tax the income statement of discontinued operations;
ii the related income tax expense (see IAS 12 workbook);
iii the gain or loss recorded 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; and
iv the related income tax expense (IAS 12).
The analysis may be presented in the notes, or on the face of the income statement.
If it is presented on the face of the income statement, it shall be presented in a section identified as ‘discontinued operations’, separately from continuing operations.
The analysis is not required for newly-acquired subsidiaries that are ‘held for sale’ on acquisition.
3 the net cash flows attributable to the operating, investing and financing activities of discontinued operations.
These disclosures may be presented either in the notes, or on the face of the financial statements. These disclosures are not required for newly-acquired subsidiaries that are ‘held for sale’ on acquisition.
Disclosures for the period presented cover all operations that have been discontinued. This may mean representation prior disclosures.
If there has been extra income, or expense, in this period, relating to discontinued operations sold in a previous period, the details will be listed.
i the resolution of uncertainties that arise from the terms of the disposal transaction, such as the resolution of purchase price adjustments and indemnification issues with the purchaser.
ii the resolution of uncertainties that arise from the operations of the component before its disposal, such as environmental and product warranty obligations retained by the seller.
iii the settlement of employee benefit plans obligations, if the settlement is directly related to the disposal transaction.
If a bank ceases to classify a component 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 for prior periods shall be described as having been re-presented.
Gains or losses relating to continuing operations
Gains or losses remeasurement of a “held for sale” non-current asset or disposal group is included as income from continuing operations, provided that it is not a discontinued operation.
Presentation of a non-current asset or disposal group classified as ‘held for sale’
Non-current assets and disposal groups classified as ‘held for sale’ are shown separately from other assets in the balance sheet.
The liabilities are classified as ‘held for sale’, are presented separately from other liabilities, in the balance sheet. They are not offset (assets minus liabilities) and presented as a single amount.
The major classes of assets and liabilities classified as ‘held for sale’ are separately disclosed either on the face of the balance sheet, or in the notes.
Cumulative income or expense recorded directly in equity, relating to a non-current asset or disposal group classified as ‘held for sale’ requires separate disclosure.
For a newly-acquired subsidiary that is ‘held for sale’ on acquisition, disclosure of the major classes of assets and liabilities is not required.
“Held for sale’ assets and liabilities, that have been recorded for the first time in the current period, will not be reclassified when presenting prior-period information. Therefore the comparative results will not show these “Held for sale’ assets and liabilities in previous periods.
Additional disclosures
In the period in which a non-current asset or disposal group has been either classified as ‘held for sale’ or sold, disclose in the notes:
i a description of the non-current asset or disposal group;
ii a description of the circumstances of the sale and the manner and timing of that disposal;
iii the gain or loss and where, on the face of the income statement, to find the figure that includes that gain or loss;
iv if applicable, the segment in which the non-current asset or disposal group is presented in accordance with IFRS 8 Operating Segments.
In the period of the decision to change the plan to sell the non-current asset or disposal group disclose:
- a description of the circumstances leading to the decision and
- the effect of the decision on the results of operations for the period and any prior periods presented.
Discontinuing operation Illustrated example
(from Illustrative Corporate Financial Statements 2002, PwC)
On 31 January 2002, the Group publicly announced its intention to sell the glass segment.
The subsidiary comprising this segment was sold on 30 June 2002 and is reported in these
financial statements as a discontinuing operation. The sales, results, cash flows and net assets of the glass segment were as follows:
| |6 months to 30 June |12 months to 31 Dec |
| |2002 |2001 |
| | | |
|Sales |12,200 |20,225 |
|Operating costs | 13,688 | 15,356 |
|Impairment of assets | 300 |– |
| Loss/profit from operations | 1,788 |4,869 |
|Finance cost | 585 | 1,258 |
| Loss/profit before tax | 2,373 |3,611 |
|Tax |783 | 1,192 |
| Loss/profit after tax | 1,590 |2,419 |
|Operating cash flows | 765 |5,670 |
|Investing cash flows |1,832 | 3,514 |
|Financing cash flows | 1,639 |1,338 |
|Total cash flows | 572 |3,494 |
| | | |
| |At 30 June 2002 |At 31 Dec 2001 |
|Property, plant and equipment |35,637 |39,119 |
|Current assets |1,020 |7,375 |
|Total assets |36,657 |46,494 |
|Total liabilities | 24,351 | 31,428 |
|Net assets |12,306 |15,066 |
| | | |
|The loss on disposal was determined as follows: | | |
|Net assets sold |12,306 | |
|Reclassifications from shareholders’ equity | | |
|– currency translation differences |354 | |
|– goodwill previously written off to equity |1,245 | |
|Proceeds from sale | 12,946 | |
|Loss on disposal |959 | |
|Tax thereon – | | |
|After-tax loss on disposal |959 | |
|The net cash inflow on sale is determined as follows: | | |
|Proceeds from sale |12,946 | |
|Less: cash and cash equivalents in subsidiary sold | 497 | |
|Net cash inflow on sale |12,449 | |
| |
|Note – Non-current assets held for sale and discontinued operations |
|(from Illustrative Corporate Financial Statements 2006, PwC) |
| |
|The assets and liabilities related to Omikron (part of the manufacturing and wholesale segment) have been |
|presented as held for sale following the approval of the Group’s management and shareholders on 23 September 2006 |
|to sell Omikron in Euravia. |
| |
|The completion date for the transaction is expected by May 2007. |
| |2006 |2005 |
|Operating cash flows |300 |190 |
|Investing cash flows |(103) |(20) |
|Financing cash flows |(295) |(66) |
|Total cash flows |(98) |104 |
|Under this approach, the entity presents the cash flow statement as if no | | |
|discontinued operation has occurred. | | |
|It would also be acceptable to present the three categories separately on the face| | |
|of the cash flow statement and present the line-by-line breakdown of the | | |
|categories, either in the notes or on the face of the cash flow statement. | | |
|It would not be acceptable to present all cash flows from discontinued operations | | |
|in one line either as investing or operating activity. | | |
|(a) Non-current assets classified as held for sale | | |
| |2006 |2005 |
|Disposal group held for sale: |341 |– |
|( Property, plant and equipment | | |
|( Intangible assets |100 |– |
|( Inventory |442 |– |
|( Other current assets |228 |– |
| |1,111 |– |
|Non-current assets held for sale: | | |
|( Property, plant and equipment |1,222 |– |
|( Intangible assets |1,000 |– |
| |2,222 |– |
|Total |3,333 |– |
| |
|(b) Liabilities directly associated with non-current assets classified as held for sale |
| |2006 |2005 |
|Trade and other payables |104 |- |
|Other current liabilities |20 |- |
|Provisions |96 |- |
| |220 |- |
| |
|(c) Analysis of the result of discontinued operations, and the result recognised on the remeasurement of assets or |
|disposal group. (These disclosures can also be given on the face of the primary financial statements.) |
| |2006 |2005 |
|Revenue |1,200 |1,150 |
|Expenses |(960) |(950) |
|Profit from discontinued operations – before tax |240 |200 |
|Tax |(96) |(80) |
|Profit from discontinued operations – after tax |144 |120 |
|Pre-tax gain/(loss) recognised on the remeasurement of assets of disposal group |(73) |– |
|Tax |29 |– |
|Gain/(loss) recognised on the remeasurement of assets of disposal group – after | | |
|tax |(44) |– |
|Profit for the year from discontinued operations |100 |120 |
7. Multiple Choice Questions
1. IFRS 5 covers:
i) The classification, measurement and presentation of assets ‘held for sale’.
ii) The classification and presentation of discontinued operations.
iii) The impairment of long-lived assets to be held and used.
1. i
2. ii
3. iii
4. i-ii
2. Assets that meet the criteria to be classified as ‘held for sale’ are measured
1. Carrying amount.
2. ‘Fair value, less costs to sell’.
3. The lower of 1 and 2.
4. The higher of 1 and 2.
3. For assets that meet the criteria to be classified as ‘held for sale’ depreciation on such assets:
1. Ceases.
2. Is reversed.
3. Is charged to discontinued operations.
4. Held for sale applies to:
1. Non-current liabilities.
2. Non-current assets.
3. Equity.
4. Current assets.
5. A disposal group, which was part of a cash-generating unit:
1.Becomes a separate cash-generating unit.
2. Becomes a non-current asset.
3. Is ignored.
6. A firm purchase commitment is an agreement, binding on both parties, that:
i) Specifies all significant terms, including the price and timing of the transactions.
ii) Includes a disincentive for non-performance, which is sufficiently large to make performance highly probable.
iii) Is with an unrelated party.
1. i
2. ii
3. iii
4. i- ii
5. i- iii
7. Recoverable amount is an asset’s:
1. ‘fair value, less costs to sell’.
2. value in use.
3. The lower of 1 and 2.
4. The higher of 1 and 2.
8. For an asset to be held for sale,:
i) It must be available for immediate sale in its present condition.
ii) Its sale must be highly probable.
iii) The management must be committed to a plan to sell the asset.
iv) The management must have an active programme to locate a buyer.
v) The asset must be actively marketed for sale.
vi) The sale should be expected to be completed within one year from the date of classification.
vii) The asset should be fully depreciated.
1. i
2. ii
3. iii
4. i- v
5. i- vi
6. i – vii
9. When a bank acquires a non-current asset or disposal group exclusively with a view to its subsequent disposal, it shall classify the non-current asset or disposal group as ‘held for sale’ at the acquisition date, only if:
1. The one year requirement is met.
2. A buyer has been identified.
3. It will be sold at a premium to net assets.
10. If the criteria are met after the balance sheet date, a bank shall:
1. Classify a non-current asset as ‘held for sale’ in those financial statements.
2. When those criteria are met, after the balance sheet date, but before the approval of the financial statements for issue, the bank shall disclose the information in the notes.
3. Classify a non-current asset as ‘discontinued operations’ in those financial statements.
11. If the disposal group to be abandoned:
- 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,
at the date on which it ceases to be used, the bank shall present the results and cash flows of the disposal group as:
1. ‘Discontinued operations’.
2. ‘Held for sale’.
3. ‘Continuing operations’.
12. If a newly acquired asset is ‘held for sale’, the asset or disposal group will be measured at:
1. Cost.
2. Fair value, less costs to sell’.
3. The lower of 1 and 2.
4. The higher of 1 and 2.
13. If the asset or disposal group is acquired as part of a business combination, it shall be measured at:
1. Cost.
2. Fair value, less costs to sell’.
3. The lower of 1 and 2.
4. The higher of 1 and 2.
14.Subsequent remeasurement: Provisions for obsolete inventory and doubtful debts should be reviewed:
1. Before the group’s ‘fair value, less costs to sell’ is remeasured.
2. After the group’s ‘fair value, less costs to sell’ is remeasured.
3. At the same time that the group’s ‘fair value, less costs to sell’ is remeasured.
15. An adjustment, to the carrying amount of a non-current asset that ceases to be classified as ‘held for sale’, is recorded in:
1. Equity.
2. Income from continuing operations.
3. Income from discontinued operations.
8. Answers to Multiple Choice Questions
|Question |Answer |
| |4 |
| |3 |
| |1 |
| |2 |
| |1 |
| |5 |
| |4 |
| |5 |
| |1 |
| |2 |
| |1 |
| |3 |
| |2 |
| |1 |
| |2 |
IFRS WORKBOOKS (History and Copyright)
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