Non-current assets held for sale and discontinued operations (IFRS 5)
1 Non-current assets held for sale
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Must be available for immediate sale and sale must be highly probable (sell < 1 year, active programme to locate buyer, actively marketing).
Non-current asset held for sale is valued at the lower of the carrying value and fair value less costs to sell. Any reduction in value is recorded as an impairment through profit or loss.
Once classified as a non-current asset held for sale it is no longer depreciated.
The subsequent sale of the asset will give rise to a profit/loss on disposal.
Two stages. First bring the carrying amount up to date under the asset’s own standard: an asset held at cost is not revalued, while a revalued asset is revalued to the classification date under IAS 16. Then compare with fair value less costs to sell and write down through profit or loss, not OCI. No provision for the selling costs, and nothing waits until the sale.
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Example 1 – NCA-HFS
At 1 January 2015, Namibia carried a property in its statement of financial position at its revalued amount of $14 million in accordance with IAS 16 Property, Plant and Equipment. Depreciation is charged at $300,000 per year on the straight line basis.
In April 2015, the management decided to sell the property and it was advertised for sale. By 30 April 2015, the sale was considered to be highly probable and the criteria for IFRS 5 Non-current Assets Held for Sale and Discontinued Operations were met at this date. At that date, the asset’s fair value was $15·4 million. Costs to sell the asset were estimated at $300,000.
On 31 January 2016, the property was sold for $15.6 million.
The transactions regarding the property are deemed to be material and no entries have been made in the financial statements regarding this property since 31 December 2014.
Explain how the above transaction should be dealt with in the financial statements of Namibia for the year-ended 31 December 2015.
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Example Answer 1 – NCA-HFS
Depreciate asset to 30 April. Depreciation is 100 (4/12 x 300). New carrying amount will be $13.9m.
Revalue to fair value. Gain is $1.5m (15.4 – 13.9). Gain to OCI.
Value at lower of carrying amount (15.4) and FVCTS (15.4 – 0.3 = 15.1). Loss of $0.3m to P&L.
Present in SFP as current asset.
2 Discontinued operations
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Example 2 – Discontinued operations
Angola’s car manufacturing operation has been making substantial losses. Following a meeting of the board of directors, it was decided to close down the car manufacturing operation on 31 March 2016. The company’s reporting date is 31 December and the car manufacturing operation is treated as a separate operating segment.
Explain how the decision to close the car manufacturing operation should be treated in Angola’s financial statements for the years ending 31 December 2015 and 2016.
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Example Answer 2 – Discontinued operations
31 December 2015
The operation is not being sold so cannot be classified as held for sale and neither is it a discontinued operation as it is still operating until 31 March 2016. Angola is firmly committed to the closure but it hasn’t taken place and so is included in continuing operations. A disclosure in the notes can be made of the intention to close the operation in the following year.
31 December 2016
The operation is now classified as a discontinued operation as it has now ceased operating.
