IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations

This article is relevant for ACCA F7 and P2 plus AAT and CIMA papers.

In this article, Steve Collings looks at how an entity should account for non-current assets which have been classified as held for sale.

The objective of IFRS 5 is to specify how assets that both qualify for, and are treated as, ‘held for sale’ should be presented and disclosed within a set of financial statements.  The standard also deals with discontinued operations.

A non-current asset (or disposal group) that is held for sale must be up for sale in its present condition and the sale must be highly probable.  In order for the sale to be classed as ‘highly probable’, there must be certain characteristics present.

These are as follows:

  • Management must be committed to a plan to sell the asset.
  • There must be an active programme of seeking a buyer.
  • The asset (or disposal group) must be available for immediate sale.
  • The sale is highly probable.
  • The sale is expected to complete within one year of the asset being classified as held for sale.

Where an asset (or disposal group) is classified as held for sale, then depreciation of such an asset or disposal group must cease as soon as it is classified as held for sale.  The asset (or disposal group) should be carried in the statement of financial position (balance sheet) at the lowerof the carrying amount in the statement of financial position (balance sheet) and fair value less costs to sell.  Fair value is essentially how much could be received by knowledgeable and willing persons in exchange for the asset in an arm’s length transaction.

Discontinued Operations

A discontinued operation is a part of an entity that has either been disposed of or is classified as held for sale (e.g. a division of a manufacturing plan).

A discontinued operation should:

  • Represent a separate major line of business or geographical area of operations;
  • Be part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operation; or
  • Be a subsidiary acquired exclusively with a view to resale.

Where an entity has a discontinued operation, that component of the entity’s operations and cash flows must be clearly distinguished both operationally and for financial reporting purposes from the rest of the entity.

For financial reporting purposes, the revenue, expenses, pre-tax profit or loss and the income tax expense of the discontinued operation should be separately presented on the face of the statement of comprehensive income (income statement) or in the notes to the financial statements.

About the author:

Steve Collings FMAAT ACCA DipIFRS is the Audit and Technical Manager for LWA Ltd and is also a partner in AccountanyStudents.co.uk and a freelance technical author.  He is also the author of ‘The Core Aspects of IFRS and IAS’ from which this article has been extracted.  Steve also lectures on financial reporting and auditing issues.

Comments

  1. avatar says

    For financial reporting purposes, the revenue, expenses, pre-tax profit or loss and the income tax expense of the discontinued operation should be separately presented on the face of the statement of comprehensive income (income statement) or in the notes to the financial statements. Is this correct?

    As per BPP “The discontinued operation should be shown as a one-line entry representing the posttax profit or loss of the operation and the post-tax gain or loss on disposal”

    • Profile photo of MikeLittle says

      Hi

      There are two ways of presenting the information with reference to a discontinued operation

      1) it may be shown in detail on the statement of profit or loss, or

      2) it may be shown as a one line item on the statement of profit or loss with full line by line detail disclosed in the notes to the financial statements

      Ok?

      • avatar says

        Dear Mike Little,
        Thanks for the reply. May I reproduce the relevant portion of IFRS below. The emphasis is on 1) single line disclosure and 2) Post tax.

        So in an exam question will we get marks if we write differently.

        Presenting discontinued operations
        IFRS 5(33)(a) An entity shall disclose a single amount in 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 the disposal of the assets or disposal group(s) constituting the discontinued operation.
        Warm regards

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