The core principle is that a non-current assets is deemed to be held for sale if its carrying value is expected to be recovered through selling it rather than using it. Making this judgment has two important accounting implications: Non-current assets held for sale
- It is carried within current assets in the statement of financial position; and Non-current assets held for sale
- It is not depreciated from the date of reclassification. Non-current assets held for sale
In order to make this judgment, the asset must meet two strict conditions:
- It is available for immediate sale in its present condition at the date classification to “held for sale” is made (this means the asset cannot be in use); and Non-current assets held for sale
- The sale must be highly probable. Non-current assets held for sale
The first of these is a fact, whereas the second is an opinion. IFRS 5 offers guidance on when this opinion is likely to be justified. According to IFRS 5, a sale is considered to be highly probable when all the following are met:
- Management, having the authority to approve the action, commits to a plan to sell the asset.
- The assets are available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets. Non-current assets held for sale
- An active marketing program is identified to locate a buyer and other actions required to complete the plan to sell the asset have been initiated. Non-current assets held for sale
- The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year. Non-current assets held for sale
- The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a long-lived asset is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset.
Consideration and analysis should additionally be applied to the overall carrying value of the asset held for sale at the time of reclassification. The overall carrying value should be the lower of cost or fair market value less estimated selling costs. If fair value less estimated selling costs is determined to be less than the current book value, an impairment should be reported through earnings in the period of reclassification. The adjusted carrying amount will become the asset’s new basis.
All assets classified as held for sale should not be depreciated. However, any interest and other expenses attributable to the disposal of the asset classified as held for sale shall continue to be accrued and expensed.
Change of plans
If criteria for an asset to be classified as held-for-sale are no longer met, then the asset or disposal group ceases to be held-for-sale. In this case, it should be valued at the lower of the carrying amount before the asset or disposal group was classified as held-for-sale (as adjusted for any subsequent depreciation, amortisation or re-valuation), and its recoverable amount at the date of the decision not to sell. Any adjustment to the value should be shown in income from continuing operations for the period.
An entity has agreed in a directors’ meeting to sell a building, and has tentatively started looking for a buyer for the building. The price of the building has been fixed at $4m and a surveyor has valued the building based on market prices at $3.6m. The entity will continue to use the building until another building has been found with equivalent facilities, and in a suitable location for the office staff, who will not be relocated until the new building has been found.
Additionally, the entity is planning to sell part of its business and has actively marketed the business at a fair price but, before the business can be sold, government approval is required and any sale requires government approval. This means that the sale time is difficult to determine and it may take longer than one year to sell the disposal group.
The building will not be classified as held-for-sale as it is not available for immediate sale because, until new premises have been found, the office staff will remain in the existing building. Also, the directors have only tentatively started looking for a buyer which may indicate that the entity is not committed to the sale. Additionally, the price being asked for the building is above the market price, and is not reasonable compared to that price. It is unlikely that the entity will sell the building for that price.
The disposal group, however, would be classified as held-for-sale because the delay is caused by events or circumstances beyond the entity’s control, and there is evidence that the entity is committed to selling the disposal group.
See also: The IFRS Foundation