IFRS 5: Non-current assets held for sale and discontinued operations
IFRS 5 pertains to non-current assets held for sale. Such assets arise when entities decide to either discontinue certain operations or otherwise decide to sell assets that were originally not current assets. Once assets are designated as not held for being continuously used, they would not properly be classified as property plant and equipment, or other appropriate classification. IAS 35 originally provided for accounting for such assets. This Standard replaces IAS 35.
A non-current asset may be held for disposal either as a single asset or as “disposal group”. Such assets are treated as “held for sale” by the accounting standard. Held-for-sale non-current assets are treated at lower of cost or fair value, and are not subject to depreciation. These assets are separately reflected in financial statements.
The IFRS is applicable only to non-current assets. Current assets are meant for disposal as a part of the operating cycle of the entity – hence, the question of applying this Standard to such assets does not arise. A non-current asset will be subject to this Standard, and treated as “held for sale” if the cash flows from the asset are to come from its disposal, and not continued use.
Either single assets or “disposal groups” may be held for sale. A disposal group is 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. Usually, business divisions may be classified as disposal groups. The difference between single assets and disposal groups is that in the latter case, the assets and liabilities of the group are valued together, for measuring their carrying values.
Note that within the category of held-for-sale assets, distinction is made between continuing operations and discontinued operations..
The key principle is, in case of assets/disposal groups held for sale, they will be carried in books at their carrying value or fair value, less costs to sell. Assets may also be held for distribution to owners – in which case they will be carried at their carrying value or fair value, less costs to distribute.
If the selling costs for disposal of non-current assets are to occur more than 1 year later, the costs will be present valued.
The Standard is not applicable to deferred tax assets [IAS 12], assets arising out of employee benefit plans [IAS 19], financial assets [IAS 39], investment property valued under revaluation model [IAS 40], agricultural assets at fair value less cost to sell [IAS 41], and assets under insurance contracts [IFRS 4]. These assets, if they form part of a disposal group, will be valued as per relevant IFRSs.
Held-for-sale assets are not depreciated – however, they are subject to impairment charge. On subsequent measurement, it may also be that the fair value of held for sale assets may increase. An entity shall recognize gain on fair value of held for assets only to the extent of impairment loss recognized either under this Standard or under IAS 36. Eventually, when the held for sale assets are derecognized (for example, on sale), the gain/loss not already booked shall be brought to books.
A held-for-sale asset may be classified out of the held-for-sale category, if the proposal for disposal ceases to remain valid. In such case, the non-current asset shall be valued at lower of:
- What value the asset would have been, subject to depreciation/amortization/impairment had the asset not been classified as held-for-sale, that is to say, taking the carrying value on the date of classification as held-for-sale, and providing depreciation etc until the date of reclassification;
- Recoverable amount on the date of decision not to sell.
Held-for-sale assets are distinguished between continuing operations and discontinued operation. A disposal group will be categorized as discontinued operation, if the group is a component of an entity, and represents a separate major line of business or geographical area of operations, or is part of a single major coordinated plan to dispose of a line of business or geographical area, or is a subsidiary acquired for the purpose of disposal. The purpose of segregation of discontinued operations is that they require separate disclosure in statement of comprehensive income. Gains/losses from held-for-sale assets forming part of continuing operations require separate disclosure in the profit/loss from continuing operations.