An entity is committed to a plan to sell a factory. The production cycle is six months and pollutants are involved. The company must meet its existing orders. Dismantling the equipment and cleaning up the pollution will put the facility out of action for six months. Does the factory meet the criterion of ‘availability for immediate sale’? Highly probable?
No. The fact that several months must be spent fulfilling existing orders and then dismantling and cleaning the factory means that it is not available for immediate sale in its present condition. Therefore, the factory cannot be classified as held for sale at the date of the decision to sell.
When a sale is ‘highly probable'? Highly probable?
IFRS 5 states the criteria which must be met for a sale to be deemed highly probable: Highly probable?
- The appropriate level of management (for example, the Board of Directors in a public limited company) must be committed to a plan to sell the asset. For example, a press release might have been published announcing the decision made by the company’s Board of Directors; Highly probable?
- The entity must have launched an active programme to locate a buyer and complete the plan: thus, it is not necessary to have actually found a buyer in order to meet the IFRS 5 criteria. A fortiori, it is not necessary to have a firm purchase commitment. For example, a company might have engaged estate agents to sell buildings; Highly probable?
- The asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value: thus, if the seller is hoping for a sale price that is much higher than the asset’s fair value at the date it is put on the market, it is unlikely that a buyer will be found; Highly probable?
- It should be possible to complete the sale – and thus derecognise the asset – within one year of the date of classification as held for sale, except where the standard permits otherwise.
- The 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the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Exceptions to the 12-month limit are detailed in Appendix B of IFRS 5. Therefore, an extension of the period required to complete a sale does not preclude an asset from being classified as held for sale. If the delay is caused by events or circumstances beyond the entity’s control and there is sufficient evidence that the entity remains committed to its plan to sell the asset, it may still be classified as held for sale.
In practice, these exceptions apply in two types of situation: Highly probable?
- Either it is probable, from the time of the initial decision to sell, that the sale will not be completed within a year; for example, due to particular regulatory constraints on the planned sale;
- Or the time taken to complete the sale is extended by unpredictable events or circumstances. Highly probable?
Example Committent to sell a business line Highly probable?
An entity in the energy sector is committed to selling one of its business lines. This requires regulatory approval. It could take more than twelve months to obtain this approval. However, a firm purchase commitment must have been signed before approval can be obtained. In the present case, a firm purchase commitment is highly probable within a year. In this situation, the conditions for an exception to the one-year limit would apply.
Example Sell a non-current asset
An entity is committed to a plan to sell a non-current asset. The asset is therefore classified as held for sale at the date of the decision to sell. Over the initial one-year period, the market conditions that existed at the date of the decision to sell deteriorate significantly. As a result, the asset has not been sold at the end of the twelve-month period. Highly probable?
If the asset continues to be actively marketed with a view to sale, at a price which does not exceed its fair value (the price having necessarily been reduced in light of the new market conditions), the asset may continue to be classified as held for sale even after the end of the twelve-month period.
Plan to sell a factory Highly probable?
Plan to sell a factory Highly probable?
Plan to sell a factory Highly probable? Plan to sell a factory Highly probable? Plan to sell a factory Highly probable? Plan to sell a factory Highly probable?