To understand it properly, take a brief look back at IAS 1, Presentation of Financial Statements.
In most cases, IAS 1 requires an entity to present current and non-current assets and liabilities separately in the statement of financial position. While current assets (and liabilities) are clearly defined by the standard, non- current assets (and liabilities) are defined by default: “An entity shall classify all other assets as non-current”.
The rules on classification and presentation given in IFRS 5 apply to all non-current assets, as well as all disposal groups. A disposal group is defined in the standard as “a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated (…) or if it is an operation within such a cash-generating unit.” Therefore, these groups may also include current assets.
For example, if an entity decides to sell its stake in a subsidiary, the disposal group will not only include consolidated non-current assets relating to the subsidiary, but also the current assets and the liabilities of the fully-consolidated subsidiary.
In this document, the term “non-current asset” may be taken to also include “disposal group”.
Example – What are the liabilities relating to a disposal group?
Generally speaking, this refers to the liabilities of the entity to be disposed of, rather than the liabilities incurred to fund the acquisition of the entity in question. The latter are in fact liabilities of the parent company, which will generally remain liable for the amounts on question after the sale.
Some liabilities which are recognised directly in the accounts of the parent company should nevertheless be analysed, to determine whether they should be included in the disposal group. Examples include employee benefits and cash-settled share-based payments which would be concluded at the group level.
These liabilities would need to be analysed on a case-by-case basis to see whether they should be derecognised due to the sale of the entity they relate to.
Example – Intra-group debts and assets held-for-sale
When a parent company decides to sell the entirety of its stake in a consolidated subsidiary, and the IFRS 5 criteria for the classification of a disposal group as held for sale are met, the subsidiary remains consolidated under IAS 27 until the date of loss of control (later than the date on which the group of assets is deemed to have met the criteria imposed by IFRS 5).
Under the full consolidation method, intra-group debts and receivables should be eliminated from the consolidated statement of financial position, while the subsidiary remains consolidated. This raises the question of whether only the external portion of the net assets held for sale should be presented, even though the net assets actually sold will include intra-group debts and receivables, which will become external debts and receivables due to the sale.
Since IFRS 5 is silent on this point, companies have used a diverse range of practices. In our opinion, the consolidation principles given in IAS 27 (i.e. the elimination of intra-group debts and receivables) must be upheld until the date of loss of control. However, when measuring the disposal group in accordance with IFRS 5, net assets should be deemed to include intra-group assets and liabilities, so as to reflect in the accounts the actual loss which will be made at the time of the sale.
The following example serves to illustrate the case above:
Net assets of the subsidiary held for sale in the consolidated accounts (after elimination of intra-group debts and receivables and parent equity):
Property, plant and equipment
Net assets held-for-sale
- Intra-group financial debt: 200 (advance from the parent company to the subsidiary included in the liabilities of the disposal group)
- Net assets/parent equity of the disposal group: 250 – 200 = 50
- Sale price: 300
Actual gain expected: 300 – 50 = 250
Assessment classification to Non-current assets held-for-sale
IFRS 5 6 includes the general principle for classification: “An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.”
Therefore, a non-current asset which is to be abandoned should not be classified as held for sale.
This is because its carrying amount will be recovered principally through continuing use. For example, if a group decides to abandon a particular line of business, which comprises non- current assets, these assets will continue to be presented in their original categories until the date on which the business is abandoned.
IFRS 5 stipulates two conditions which must be met in order to conclude that the carrying value of a non-current asset will be recovered principally through a sale transaction:
- The asset must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets or disposal groups; and
- The sale of the non-current asset must be highly probable.
The presentation of assets held for sale is as follows:
If liabilities are also part of the non-current assets held-for-sale these are not netted but shown similarly as a class in between current liabilities and total liabilities.
Non-current assets held-for-sale
Non-current assets held-for-sale
Non-current assets held-for-sale Non-current assets held-for-sale Non-current assets held-for-sale Non-current assets held-for-sale