IFRS 5 deals with the accounting for non-current assets held-for-sale, and the presentation and disclosure of discontinued operations. It introduces a classification for non-current assets which is called "held-for-sale".

A non-current asset is classified as held-for-sale by an entity if its carrying amount is recovered primarily through the sale of the asset rather than through use. The classification also applies to disposal groups that are a group of assets and possibly certain liabilities that are intended to be disposed of by an entity in the course of a single transaction.

Criteria of IFRS 5 - Non-current asset held for sale

  1. The asset must be available for immediate sale
  2. The sale should be Highly Probable
    1. The asset must be Marketed Actively (Active Market)
    2. Active Plan to Locate/Find a Buyer
    3. Selling Price should be Reasonable
    4. Must be sold within a year. (12 months)
    5. There should be a management commitment to sell an asset
    6. Plan to Sell an Asset should not be Changed, Nor withdrawn (Cancel)

If all these conditions are met, then we will Classify the asset as "Held-for-Sale".

There is an Exception in 1 Year Rule (Asset Must be sold within a year).

If Delay is beyond Company's control, then this condition can be ignored.

Explanation of the terms

The asset must be available for immediate sale

The asset must be available for sale right away in its present condition. This means, In whatever condition the asset is, it should be available/ready for sale.

Selling Price should be reasonable

The selling price should be set according to the market and should be reasonable. It should not be overpriced unnecessarily.

management commitment

There are actually three things hidden under the term 'management commitment'
  1. Selling decision should be taken by the management
  2. They should have a plan
  3. They can not change the plan, they can not withdraw from their decision (cancel) to sell an asset.

What next if criteria met?

"Classify Non-Current asset as Current Asset and Mark it as "held for sale".
From the financial statement prospect, You will remove that asset from the Non-Current asset section will bring it to the Current Assets section, and mark it 'held for sale".

Double-Entry of Recognising Non-Current Asset as Held for Sale.

Dr. Non-Current Asset Held For Sale --> (Recognising NCA as held for sale)
       Cr. Non-Current Asset --> (Dercognising NCA)

How will you value it then? What amount will be written in Current Asset? Will it be the same as was written in Non-current assets?

Well, No!
You will value that asset at a Lower of:

    (a) Carrying amount, and
    (b) Fair value less cost to sell
'Whatever will be lower, you will write that in the current asset as a value of that asset.'

What about the difference between the Carrying amount and Fair value less cost to sell? 🤔

The difference between the 'carrying amount' and 'Fair value less costs to sell' will be called 'Impairment' if, and only if the 'Carrying amount' is higher than 'Fair value less cost to sell'.

      Carrying Amount800
      Fair Value less Cost to sell 600

      Impairment Loss200

Subsequent Accounting Treatment

It will be Measure at Fair Value less Cost to sell @ each Reporting Date (Year End)

Gain or Loss will be taken to --> PnL

Gains have a limit.

Gains should NOT exceed Previously Recognised Loss (impairment) under IFRS 5 and IAS 36.

What if the Fair Value of that asset (that is held for sale) increases subsequently?

If there is a subsequent increase in the Fair Value of the asset that is held for sale, the surplus will be used to minimize the 'Impairment loss'. Means, Impairment loss can be reversed by the amount of increase in the Fair Value but it cannot exceed the Impairment loss amount.

Let's understand it with the illustration.

Suppose, the Impairment loss previously recognized in PnL is $100. Subsequently, The Fair value of the asset that is held for sale, increased by $120.
You can reverse the Impairment loss upto $100 from that amount of $120. The Remaining $20 will be ignored.
So, after reversing the Impairment Loss, the Impairment loss will remain 0 in PnL.

If Non-Current Asset is classified as held for sale, Do we Depreciate it?

Ans: No!

    "When Non-current asset is held for sale, No Depreciation will be recognized Even if the asset is in use".


Discontinued Operations

Discontinued Operations actually means "Closing Down OR Discontinue the components of an Entity from operating/(operations)".

Components of an Entity

That have separate
  • Revenue, or
  • Cost, or
  • Separate Profit and Loss.
It could be a Division of the entity, A line of the business, An Area of the Operation.
Discontinued Operations can either be classified as;
  • Discontinued, or
  • Held for sale
In both cases, We will treat it as "Discontinued Operations".

Classification as Discontinued Operation for Subsidiary

To be classified as Discontinued Operation, A Subsidiary must either be
  • Disposed of, or
  • Classified as Held for sale, and is;
    • a separate major line of the business or geographical area of the operation;
    • a single co-ordinated plan to dispose of a separate major line or area of operation;
    • a subsidiary acquired exclusively for resale.

🌟⭐ END ⭐🌟

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