New International Accounting Standard, IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations
IFRS 5 was issued to converge the accounting treatment under IFRS, US and UK/ROI GAAP in the specific area of assets held for sale and discontinued operations. IFRS 5, the UK draft standard FRED 32 (which amends FRS 3), and the US standard SFAS 144 (excluding the section in SFAS 144 on impairment) are broadly similar.
'Held for resale'
- there will be a new balance sheet classification within the current assets categorisation called 'held for resale'
- the 'held for resale' classification could contain both fixed assets and whole trading operations with both assets and liabilities, although assets and liabilities held for resale will be disclosed separately in current assets and liabilities
- 'held for resale' items will be valued at the lower of carrying value or fair value less selling costs
- assets included in 'held for resale' will not be depreciated (even though they may continue to be used); and
- 'held for resale' items are shown separately on the balance sheet.
- an operation becomes 'discontinued' when it meets the criteria for being 'held for resale' (FRS 3 has more stringent criteria);
- the results for discontinued operations are to be shown separately on the profit and loss account (similar to the requirement under FRS 3); and
- IFRS 5 prohibits retroactive classification of an operation as discontinuing.
Assets held for resale
Deferred tax, pension surpluses, financial assets such as derivatives and financial instruments, investment properties, agriculture assets (which are valued at fair value under IAS 41), and certain contractual rights under insurance contracts are not to be included in the items held for resale category. These items are excluded because they are already at fair value or are 'difficult' to value.
To be included in the category of 'held for resale' the asset must be:
- available for immediate sale in its present condition
- a sale is highly probable
- there must be active marketing
- a reasonable price has been set and
- the sale is expected to be completed within a year.
Assets to be abandoned may be classified as discontinued in the profit and loss account but may not be disclosed as held for resale in the balance sheet. Any impairment loss on assets transferred to 'held for resale' should be recognised in the profit and loss account. Gains on assets 'held for resale' can also be recognised but only to the extent that they reverse a previous impairment. Assets ceasing to meet the criteria for 'held for resale' should be reclassified back to fixed assets at the lower of: its original carrying value adjusted for depreciation that was not charged because the asset was 'held for resale'; or its recoverable amount.
To be disclosed as discontinuing, the operation must have been discontinued or be in the asset held for resale category. The component discontinued must be clearly distinguishable operationally and for reporting purposes. It should represent a separate major line of business (or geographical area of business), be part of a single major plan or be a subsidiary acquired exclusively for resale.
For discontinued operations, a company should disclose:
- post tax profit and loss and loss incurred on restatement of the assets held for resale to fair value
- an analysis of sales, pre tax profits (or losses)
- related income tax
- cash flows related to operating, investing and financing activities and comparatives for the above.
Other items required are disclosures of indemnities and earn outs, warranties and settlement of pension rights. In the notes to the financial statements you will also need to disclose:
- a description of the items in 'held for resale';
- a description of the facts and circumstances of the sale
- any impairment losses
The IFRS may be applied early if the necessary valuation and other information needed to apply the IFRS are obtained. All entities must apply the IFRS for accounting periods beginning on or after 1 January 2005.
Aidan Clifford FCCA FCA - Advisory Services Manager, ACCA Ireland