IFRS 5: Held for sale and discontinued operations
When an asset is held for sale, measuring it at the lower of carrying amount and fair value less costs to sell, and showing discontinued operations.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: The rules for assets (or whole parts of a business) the company has decided to sell rather than keep using.
The key idea: once an asset is held for sale, stop depreciating it, measure it at the lower of carrying amount and fair value less costs to sell, and show it separately. A whole business line that is sold or held for sale is a discontinued operation, shown as one line in profit or loss.
Example. A building with a carrying amount of £400,000 is put up for sale. It is worth £360,000 and selling costs are £10,000. It is written down to £350,000, a £50,000 impairment loss, and no longer depreciated.
Key words
- Held for sale
- A non-current asset (or disposal group) whose carrying amount will be recovered mainly through a sale rather than through continuing use.Example: A factory being actively marketed, with a sale expected in 6 months.
- Fair value less costs to sell
- The price that would be received for the asset, less the costs of selling it (not finance costs or tax).Example: Fair value 360,000 − legal and agent fees 10,000.
- Disposal group
- A group of assets, and the liabilities directly linked to them, to be disposed of together in a single transaction.Example: A shop sold with its fittings, inventory and lease liability.
- Discontinued operation
- A component that has been disposed of or is held for sale and is a separate major line of business or geographical area (or part of a plan to dispose of one, or a subsidiary bought only to resell).Example: Closing down the company’s whole European division.
Learn
When is an asset held for sale?
It must be available for immediate sale in its present condition, and the sale must be highly probable:
- management (at the right level) is committed to a plan to sell
- an active programme to find a buyer has started
- it is marketed at a reasonable price compared with its fair value
- the sale is expected to be completed within 12 months of classification (longer only if the delay is outside the company’s control and it is still committed)
- it is unlikely the plan will change significantly or be withdrawn
An asset that will be abandoned (scrapped or closed) is not held for sale, because it won’t be sold.
Measurement
- Just before classification, measure the asset under its usual standard (for example, charge IAS 16 depreciation up to that date).
- Then measure at the lower of carrying amount and fair value less costs to sell. Any write-down is an impairment loss in profit or loss.
- Stop depreciating it.
- A later increase in fair value less costs to sell is a gain, but only up to the total impairment losses recognised before.
In the statement of financial position, assets held for sale (and the liabilities of a disposal group) are shown separately, normally within current assets and current liabilities. Comparatives are not changed.
Discontinued operations
Show one amount in profit or loss: the post-tax profit or loss of the discontinued operation plus the post-tax gain or loss on measuring it to fair value less costs to sell, or on disposing of it. Its revenue, expenses and tax are analysed on the face or in the notes. The comparatives are re-presented so the prior year shows the same operation as discontinued too.
Worked example
On 1 July 20X5 a company decides to sell a machine and meets all the held-for-sale criteria. Its cost was £600,000, depreciated at £60,000 a year, and its carrying amount at 1 January 20X5 was £420,000. At 1 July its fair value is £360,000 and the selling costs are £10,000. The year end is 31 December.
| Step | £ |
|---|---|
| Carrying amount at 1 January | 420,000 |
| Depreciation to 1 July (60,000 × 6/12) | (30,000) |
| Carrying amount at classification | 390,000 |
| Fair value less costs to sell (360,000 − 10,000) | 350,000 |
| Impairment loss to profit or loss | 40,000 |
At 31 December the machine is shown as a non-current asset held for sale at £350,000, with no further depreciation. If it is sold in February for £352,000 net of costs, there is a £2,000 profit on disposal.
Practice questions
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