This is a case for the measurement of building held for sale under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
Pinch plc owns a building which it has used for many years as a factory. On 1 January 2012 the building had a carrying value of €15m with an estimated useful economic life of 15 years. Pinch uses the cost model under IAS 16 to account for buildings.
On 1 April 2012 Pinch plc commenced operations in a new building, and the old one was placed on the market as it was no longer being used. The estimated proceeds of sale were €13 million, less selling costs of €0.2 million. It was seen as highly probable at that date that the building would sell at that price. By year end, 31 December 2012, the building remained unsold, so Pinch plc reduced the asking price to €11m. The estimate of selling costs remained the same. The directors of Pinch plc believed at that date it was highly probable the sale would occur within 12 months at the lower price.
The question, off course, is what the measurement of the old building should be in the books of Pinch plc for year ended 31 December 2012.
The accounting for the building is as follows based on IFRS 5: Measurement of Building held for sale
The building qualifies for transfer to “held for sale” on 1 April 2012 as the two conditions were met at that date:
- It was available for immediate sale in its present condition at the date classification to ‘held for sale’ is made; and
- The sale was considered highly probable. Measurement of Building held for sale
The carrying value on 1 April 2012 was €15 million less 3 month’s depreciation (15m * 1/15 * 3/12) of €0.25 million. Therefore the carrying value was €14.75 million. Always assume depreciation is calculated on a time-apportioned basis unless otherwise instructed.
The ‘fair value less costs to sell’ on 1 April 2012 was €12.8 million (13m – 0.2m). Therefore the initial value to be assigned to the non-current asset held for sale is €12.8 million (being the lower of (1) carrying value at date of transfer and (2) ‘fair value less costs to sell’).
The loss in value of €1.95 million (14.75m – 12.8m) is taken to profit or loss for the year.
No depreciation is charged from 1 April 2012.Measurement of Building held for sale
At 31 December 2012, the next reporting date, the asset has not been sold. The applicability of the conditions is reviewed, and the fair value less costs to sell is also reviewed. Based on the failure to sell the asset, the price was reduced.
The conditions are still met in that: Measurement of Building held for sale
- It is still available for immediate sale in its present condition; and
- The sale is still considered highly probable. Measurement – Building held for sale
Therefore the classification continues to be ‘held for sale’, but the asset’s carrying amount is reduced to the revised ‘fair value less costs to sell’ of €10.8 million (11m – 0.2m). The further reduction in value of €2 million (12.8m – 10.8m) is taken to profit or loss for year ended 31 December 2012.
Other topics regarding held for sale:
Available for immediate sale
An asset/disposal group must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (IFRS 5 7).
See Examples 1-3 accompanying IFRS 5. Measurement of Building held for sale
Sale highly probable
For the sale to be highly probable, the following conditions must be met (IFRS 5 8): Measurement of Building held for sale
- the appropriate level of management must be committed to a plan to sell the asset/disposal group
- an active programme to locate a buyer and complete the plan must have been initiated
- the asset/disposal group must be actively marketed for sale at a price that is reasonable in relation to its current fair value
- the sale should be expected to be completed within one year from the date of classification
- actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Extension of the period required to complete a sale
Paragraph IFRS 5 9 provides an exception to the one-year-to-sale rule that is one of the criterion to be met for an asset/disposal group to be classified as held for sale. This exception is discussed in detail in paragraph IFRS 5 B1. See also Examples 5-7 accompanying IFRS 5.
See also: The IFRS Foundation