Entities often acquire non-current assets exclusively with a view to disposal/sale (or acquisitions exclusively with a view to disposal). Such a non-current asset will be classified as held-for-sale at the date of the acquisition only if it is anticipated that it will be sold within the one-year period, and it is highly probable that the held-for-sale criteria will be met within a short period (normally three months) of the acquisition date.
If the criteria for classifying a non-current asset as held-for-sale occur after the balance sheet date, then the non-current asset should not be shown as held-for-sale but disclosure of the fact should be made. Acquisitions exclusively with a view to disposal
If an entity is winding up operations or ‘abandoning’ assets, then these assets do not meet the definition of held-for-sale. However, a disposal group that is to be abandoned may meet the definition of a discontinued activity. Acquisitions exclusively with a view to disposal
Abandonment means that the non-current asset has been used to the end of its economic life or the disposal group will be closed rather than sold. If the asset is temporarily not being used, it is not deemed to be abandoned.
The case: Acquisitions exclusively with a view to disposal
An entity has stopped using certain plants because of a downturn in orders. It is maintaining the plant as the entity hopes that orders will pick up in future. Additionally, it intends to shut down one-half of its manufacturing base. The units to be closed constitute a major segment of its business and will close in the current financial year.
The reasoning: Acquisitions exclusively with a view to disposal
The equipment will not be treated as abandoned as it will subsequently be brought back into usage, and the manufacturing units will be treated as discontinued operations.
Classification as a discontinued operation
A subsidiary classified as ‘held for sale’, is included in the definition of a discontinued operation, with presentation in the main statements:
Single Line “Discontinued operations” – profit after tax of the discontinued operations + gain/loss on remeasurement to held for sale
The income and expenses of the subsidiary are therefore not consolidated on a line-by-line basis with the income and expenses of the holding company.
Statement of financial position
The assets and liabilities classified as ‘held for sale’ are presented separately (however the assets and liabilities of the same disposal group may not be offset against each other).
The assets and liabilities of the subsidiary are therefore not consolidated on a line-by-line basis with the assets and liabilities of the holding company.
Statement of Cash flows
No need to disclose the net cash flows attributable to the operating, investing and financing activities of the discontinued operation (which is normally required).
The disclosure and individual fair value accounting exemptions provided in IFRS 5 for subsidiaries acquired exclusively with a view to resale should save costs and effort in the consolidation of these subsidiaries. Care should, however, be taken to ensure that compliance is achieved with the IFRS 5 criteria for classifying a disposal group as ‘held for sale’ on the date of acquisition. Failure to comply with these criteria upon the acquisition of a subsidiary acquired exclusively with a view to resale may well result in unfavourable implications for the group.
(Note: For simplicity’s sake, this example ignores taxation.)
On 1 September 20Xl a company (A) acquires a 100% interest (100 000 shares) in another entity (B) for R2.20 per share. A has acquired this interest in B exclusively with a view to its subsequent disposal, and on the acquisition date all the criteria in terms of IFRS 5 are complied with. On 1 September 20Xl the trial balance of B contains the following items:
Property plant and equipment
Liabilities at fair value
All liabilities have been designated as ‘at fair value through profit or loss’ in terms of IFRS 9. On the acquisition date, the costs to sell the 100% interest in B amount to EUR 20,000. The fair value less cost to sell of the disposal group on the acquisition date is therefore EUR 200,000 (100,000 shares x EUR 2.20 minus EUR 20,000). Goodwill amounts to EUR 20,000.
For the three months ending 31 December 20X1 (the year-end), the total profit of the subsidiary before depreciation was EUR 30,000 and was earned in cash. Depreciation of property, plant and equipment amounted to EUR 20,000. The fair value of liabilities remained unchanged on 31 December 20X1. In the consolidated financial statements, the property. plant and equipment should not be depreciated, as, in terms of IAS 16 Property, Plant and Equipment (IAS 16 55), depreciation ceases when an asset is included in an IFRS 5 disposal group.
On 31 December 20X1 the shares of B traded at EUR 2.05 per share. On the balance sheet date. the costs to sell the 100% interest in B still amount to EUR 20,000. Acquisitions exclusively with a view to disposal
On 31 December 20X1 the disposal group should be measured at the lower of its carrying amount, namely EUR 200,000 (fair value less cost to sell at acquisition date) plus EUR 30,000 cash earned since the acquisition, and the fair value less cost to sell on the balance sheet date of EUR 185,000 (100,000 shares x EUR 2.05 per share minus EUR 20,000). An impairment loss of EUR 45,000 is therefore recognised in profit or loss. Acquisitions exclusively with a view to disposal
An amount of EUR 263,000 (185,000 plus 78,000) is allocated to the non-current assets held for sale, while the liabilities are shown as EUR 78.000. Acquisitions exclusively with a view to disposal
The disclosure on the face of the consolidated income statement and balance sheet is as follows:
- A loss from discontinued operations of EUR 15,000 (30,000 minus 45,000) is disclosed as a single amount on the face of the income statement; Acquisitions exclusively with a view to disposal
- Non-current assets held for sale of EUR 283,000 (263,000 plus 20,000 goodwill) are disclosed as a single line item, non-current assets classified as ‘held for sale’, on the face of the balance sheet (refer to Guidance on implementing IFRS 5 – Example 12);
- Liabilities associated with non-current assets held for sale of EUR 78,000 are disclosed as a single line item, liabilities directly associated with non-current assets classified as held for sale, on the face of the balance sheet.
See also: The IFRS Foundation