OVERVIEW
Objective
¾
To explain the need for IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”.DEFINITIONS
PRESENTATION AND DISCLOSURE HELD FOR SALE
CLASSIFICATION
¾ Component of an entity
¾ Disposal group
¾ Discontinued operation
¾ Definitions
¾ Held for sale non-current assets ¾ Abandoned non-current assets ¾ Measurement
¾ Changes to a plan of sale
¾ Purpose
¾ Discontinued operations ¾ Continuing operations
¾ Held for sale non-current assets
1
INTRODUCTION
1.1
Reasons for issuing IFRS 5
¾
To establish principles for the classification, measurement and presentation of held-for-sale non-current assets.¾
The information provided enhances the ability of users of financial statements to make projections of an entity’s cash flows, earnings-generating capacity, and financialposition by segregating information about discontinued assets and operations from the information about continuing operations.
¾
As part of a short-term convergence project with the Financial Accounting Standards Board (FASB) in the United States, IFRS 5 was issued to achieve substantial convergence with FASB Statement 144 “Accounting for the Impairment and Disposal of Long-Lived Assets”.2
DEFINITIONS
2.1
Component of an entity
¾
Operations and cash flows that are clearly distinguishable from the remainder of the entity – both operationally and for financial reporting purposes.Commentary
So a component will have been a cash-generating unit (or a group of cash-generating units) when held for use.
2.1.1
“distinguishable”
¾
A discontinued operation must be distinguishable operationally and for reporting purposes. This will be the case if: its operating assets and liabilities can be directly attributed to it;
its income (gross revenue) can be directly attributed to it; and
at least a majority of its operating expenses can be directly attributed to it.
Commentary
Elements are directly attributable to a component if they would be eliminated when the component is discontinued.
2.2
Disposal group
¾
A group of assets to be disposed of collectively in a single transaction, and directly associated liabilities that will be transferred in the transaction.Commentary
Disposal may be by sale or otherwise.
¾
The assets include goodwill acquired in a business combination if the group is: a cash-generating unit to which goodwill has been allocated; or an operation within such a cash-generating unit.
2.3
Discontinued operation
¾
A component of an entity that either: 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 single co-ordinated plan to dispose of that line of business or area of
operations; or
is a subsidiary acquired exclusively with a view to resale.
Commentary
Discontinued operations may qualify as restructurings as defined by IAS 37
“Provisions, Contingent Liabilities and Contingent Assets” but not all restructurings will be treated as discontinued operations.
2.3.1
“separate”
¾
A discontinued operation must be a separate major line of business or geographical area of operations. An operating segment (IFRS 8 Operating Segments), would normally satisfy this criterion.
A part of a segment may also satisfy the criterion.
¾
Business entities frequently close facilities, abandon products or even product lines, and change the size of their work force in response to market forces. These changes are not usually, discontinued operations but they can occur in connection with a discontinued operation.For example:
gradual or evolutionary phasing out of a product line or class of service; discontinuance of several products within an ongoing line of business;
shifting of some production or marketing activities for a particular line of business from one location to another;
closing of a facility to achieve productivity improvements or other cost savings; and sale of a subsidiary whose activities are similar to those of the parent or other
subsidiaries or associates within a consolidated group.
2.3.2
“a single co-ordinated plan”
¾
A discontinued operation may be disposed of in its entirety or piecemeal, but always pursuant to an overall co-ordinated plan to discontinue the entire component.Illustration 1
Discontinued operations
IFRS 5, which was approved by the IASB on March 31,2004, introduces specific recognition principles for assets and liabilities held for sale and for discontinued operations and requires that financial reporting be based primarily on continuing operations. To improve transparency and comparability, the Group’s financial reporting is based primarily on continuing operations, while assets held for sale and discontinued operations are stated separately in a single line item in the balance sheet, income statement and cash flow statement.
3
HELD FOR SALE CLASSIFICATION
3.1
Definitions
¾
Current asset: An asset that satisfies any of the following criteria: expected realisation, sale or consumption:−
in the normal operating cycle; or−
within twelve months after the end of the reporting period; held primarily for trading purposes; cash or a cash equivalent.
¾
Non-current asset: An asset that does not meet the definition of a current asset.¾
A non-current asset (or disposal group) is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.Commentary
“Non-current assets (or disposal groups) classified as held for sale” will be referred to more simply as “held for sale non-current assets” in this session.
3.2
Held for sale non-current assets
3.2.1
Recognition criteria
¾
The asset must be available for immediate sale in its present condition.Commentary
But may be subject to terms that are usual and customary for sales of such assets.
¾
The sale must be highly probable. That is, significantly more likely than probable.Commentary
Probable being more likely than not.
3.2.2
Highly probable
¾
Management must be committed to a plan to sell the asset.¾
The asset must be actively marketed for sale at a price that is reasonable relative to its current fair value.¾
The sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.Commentary
However, an extension period does not preclude classification as held for sale if the delay is beyond management’s control and there is sufficient evidence of management’s commitment to its plan.
¾
The actions required to complete the plan should indicate that significant changes to the plan or withdrawal from the plan are unlikely.3.2.3
Assets acquired exclusively for disposal
¾
Non-current assets acquired exclusively with a view to subsequent disposal are classified as held for sale at the acquisition date if: the one-year criterion is met; and
it is highly probable that any other criteria that are not met at that date will be met within three months.
3.2.4
Events after the reporting period
¾
Assets are not classified as held for sale if the recognition criteria are only met after the end of the reporting period.¾
However, if the criteria are met before the financial statements are authorised for issue, the notes shall disclose the facts and circumstances.Commentary
The event is non-adjusting (see IAS 10 “Events after the Reporting Period” in the next session).
3.3
Abandoned non-current assets
¾
An asset that is to be abandoned is not classified as held for sale.Commentary
Its carrying amount will be recovered principally through continuing use.
¾
However, a disposal group that is to be abandoned is treated as a discontinued operations when it ceases to be used, providing that the definition of a “discontinued operation” is met.assets (or disposal groups) that are to be closed rather than sold. An entity shall not account for a non-current asset that has been temporarily taken out of use as if it had been abandoned.
3.4
Measurement
3.4.1
Principle
¾
Held for sale non-current assets are carried at the lower of: carrying amount; and fair value less costs to sell.
Commentary
Immediately before initial classification as held for sale, carrying amount is measured in accordance with applicable IFRSs.
3.4.2
Time value
¾
If a sale is expected to occur beyond one year, costs to sell are discounted to their present value.Commentary
Any increase in the present value of the costs to sell arising from the passage of time is treated as a financing cost.
3.4.3
Subsequent remeasurement
¾
Assets and liabilities in a disposal group are remeasured in accordance with applicable IFRSs before the fair value less costs to sell of the disposal group is remeasured.3.4.4
Impairment losses and reversals
¾
Impairment losses for initial or subsequent write-downs to fair value less costs to sell must be recognised.¾
Reversals are recognised, but not exceeding the cumulative impairment loss that has been recognised.3.4.5
Depreciation
¾
Held for sale non-current assets are not depreciated (amortised).Commentary
However, interest and other expenses attributable to the liabilities of a disposal group will continue to be recognised.
3.5
Changes to a plan of sale
¾
A non-current asset that ceases to be classified as held for sale is measured at the lower of: its carrying amount before it was classified as held for sale, adjusted for any
depreciation, amortisation or revaluations that would have been recognised had the asset not been classified as held for sale; and
its recoverable amount at the date of the decision not to sell.
¾
Any adjustment to the carrying amount is included in income from continuing operations in the period in which the held for sale criteria ceased to be met.4
PRESENTATION AND DISCLOSURE
4.1
Purpose
¾
To enable users of financial statements to evaluate the financial effects of: discontinued operations; and disposals of non-current assets (or disposal groups).
4.2
Discontinued operations
4.2.1
A single amount
¾
A single amount on the face of the statement of comprehensive income comprises: post-tax profit or loss of discontinued operations; post-tax gain or loss recognised on:
−
the measurement to fair value less costs to sell; or−
the disposal of the assets (or disposal groups) constituting the discontinued operation.4.2.2
An analysis
¾
An analysis of the single amount on the face of the statement of comprehensive income or in the notes into: the revenue, expenses and pre-tax profit or loss of discontinued operations; the gain or loss recognised on:
−
the measurement to fair value less costs to sell; or−
the disposal of the assets or disposal group(s) constituting the discontinued operation.Commentary
¾
If presented on the face of the statement of comprehensive income it is identified as relating to discontinued operations separately from continuing operations.Commentary
The analysis is not required for newly acquired subsidiaries meeting the held for sale criteria on acquisition.
4.2.3
Net cash flows
¾
Net cash flows attributable to the operating, investing and financing activities of discontinued operations must be presented on the face of the financial statements or in the notes.Commentary
Comparative information must be re-stated for prior periods presented.
4.3
Continuing operations
¾
If an entity ceases to classify a component as held for sale, the results of operations previously presented as discontinued are reclassified to continuing operations for all periods presented.Commentary
Amounts for prior periods then being described as having been re-presented.
¾
Gains and losses on the remeasurement of held for sale non-current assets that do not meet the definition of a discontinued operation are included in profit or loss from continuing operations.4.4
Held for sale non-current assets
¾
The following requirements also apply to the assets of disposal groups classified as held for sale.4.4.1
Separate classification
¾
Non-current assets classified as held for sale are to be shown separately from other assets in the statement of financial position.¾
The liabilities of a held for sale disposal group are similarly presented separately from other liabilities in the statement of financial position.Commentary
Offsetting of such assets and liabilities is strictly prohibited.
Commentary
This disclosure is not required for newly acquired subsidiaries meeting the held for sale criteria on acquisition.
¾
Any cumulative income or expense recognised in other comprehensive income relating to a held for sale non-current asset must be presented separately.¾
Comparative information is not restated.Commentary
Classification as held for sale is reflected in the period when the held for sale recognition criteria are met.
4.4.2
Additional disclosures
Commentary
The following note disclosures are made in the period in which a non-current asset is classified as held for sale or sold.
¾
A description of the non-current asset.¾
A description of the facts and circumstances of the sale or expected disposal (and the expected manner and timing of that disposal).¾
Fair value gains or losses.Commentary
If not separately presented on the face of the statement of comprehensive income, the caption in the statement of comprehensive income that includes that gain or loss.
¾
The reportable segment in which the non-current asset (or disposal group) is presented in accordance with IFRS 8 “Operating Segments” (if applicable).¾
If held for sale criteria are no longer met disclose: the decision to change the plan to sell the non-current asset; the facts and circumstances leading to the decision; and
Illustration 2
Entity X has three segments:
A Tobacco
B Alcohol
C Health foods
The following information relates to the year ended 31 December 2007:
A B C
$000 $000 $000
Revenue 200 180 110
Expenses 120 105 115
Taxation (30%) 24 22.5 (1.5)
Segment C is felt to be inconsistent with the long-term direction of the Company. Management has decided, therefore, to dispose of Segment C. On 5 November 2007 the board of directors of X voted to approve the
disposition, and a public announcement was made. On that date, the carrying amount of Segment C’s assets was $105,000 and it had liabilities of $15,000. The estimated recoverable amount of the assets was determined to be $85,000 and the directors of X concluded that a pre-tax impairment loss of $20,000 should be recognised. This was duly processed in November and is included in the above amounts
At 31 December 2007 the carrying amount of Segment C’s assets was $85,000 and it had liabilities of $15,000. There was no further impairment between 5 November and the year end.
X decided to adopt the provisions of IFRS 5 by making the necessary disclosures in the notes to the accounts.
Required:
Solution
Statement of comprehensive income for the year ended 31 December 2007
$000
Revenue 490
Expenses (320)
Impairment loss ______ (20)
150
Taxation (30%) (45)
______ 105 ______ Note to the financial statements
On 5 November 2007, the board of directors publicly announced a plan to dispose of Segment C, the health foods division. The disposal is consistent with the Company’s long-term strategy to focus its activities on the manufacture and distribution of cigarettes and alcoholic drinks and to divest unrelated activities. The Company is actively seeking a buyer for Segment C and hopes to complete the sale by the end of September 2008.
At 31 December 2007, the carrying amount of the assets of Segment C was $85,000 and its liabilities were $15,000.
During 2007, Segment C earned revenues of $110,000 and incurred expenses of $ 115,000 resulting in a pre-tax operating loss of $5,000, with a related tax benefit to the entity of $1,500.
Example 1
Following on from Worked example 1 the following information relates to the year ended 31 December 2008 before taking into account the sale of Segment C:
A B C
$000 $000 $000
Revenue 230 195 90
Expenses 130 115 100
Taxation (30%) 30 24 (3)
On 30 September 2008 X sold Segment C to Z Corporation for $60,000. The carrying amount of Segment C’s net assets at that date was $70,000. The loss on disposal will attract tax relief at 30%.
The sale contract obliges X to terminate the employment of certain employees of Segment C, incurring an expected termination cost of $30,000, to be paid by 31 March 2009. This has not been accounted for as at the year end and will attract tax relief at 30%.
X has decided to make the disclosures required in respect of the transactions on the face of the statement of comprehensive income.
Required:
Proforma solution
Statement of comprehensive income for the year ended 31 December 2008
Continuing operations (A and B)
Discontinued operations
(C only)
Entity as a whole
2007 2008 2007 2008 2007 2008 $000 $000 $000 $000 $000 $000
Revenue
Expenses
Impairment
loss
Provision for termination of employment
Taxation (30%)
Note to the financial statements
FOCUS
You should now be able to:
¾
discuss the importance of identifying and reporting the results of discontinued operations;EXAMPLE SOLUTION
Solution 1
Statement of comprehensive income for the year ended 31 December 2008
Continuing operations (A and B)
Discontinued operations
(C only)
Entity as a whole
2007 2008 2007 2008 2007 2008
$000 $000 $000 $000 $000 $000
Revenue 380 425 110 90 490 515
Expenses (225) (245) (95) (100) (320) (345)
Impairment
loss – – (20) (20)
Loss on
disposal (10) (10)
Provision for termination of employment
– – – (30) – (30)
155 180 (5) (50) 150 130
Taxation (30%) (46.5) (54) 1.5 15 (45) (39)
108.5 126 (3.5) (35) 105 91
Note to the financial statements
On 30 September 2008 the Company sold its health food operations to Z Corporation for $60,000. The Company decided to dispose of Segment C because its operations are in areas apart from the core business areas (cigarette and beverage manufacture and distribution) that form the long-term direction of the Company. Further, Segment C’s rate of return has not been equal to that of the Company’s other two segments during the period.
The loss on disposal of Segment C (before income tax benefit of $3,000) was $10,000.
