NON-CURRENT ASSETS HELD FOR SALE: CLASSIFICATION

Under IFRS 5 Non-current assets held for sale and discontinued operations, a non-current asset or disposal group should be classified as 'held for sale' if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

A disposal group is a group of assets and/or liabilities that an entity intends to dispose of in a single transaction. An example would be a subsidiary company.

IFRS 5 requires the following conditions to be met before an asset or disposal group can be classified as 'held for sale':

1. The item is available for immediate sale in its present condition.
2. The sale is highly probable.
3. Management is committed to a plan to sell the item.
4. The entity is actively trying to find a buyer.
5. The item is being actively marketed at a reasonable price in relation to its current fair value.
6. The sale is expected to be completed within one year from the date of the classification (there is an exception to this as explained below).
7. It is unlikely that the plan will change significantly or be withdrawn.

Assets that are to be abandoned or wound down gradually cannot be classified as 'held for sale' because their carrying amounts will not be recovered principally through a sale transaction.

Changes to a plan of sale

If a sale does not take place within one year, an asset or disposal group can still be classified as 'held for sale' if:

• the delay has been caused by events or circumstances beyond the entity's control; and
• there is sufficient evidence that the entity is still committed to the sale.

Illustration 1 

On 1 December 20X7, Cavenzi became committed to a plan to sell a surplus office property and has already found a potential buyer. On 15 December 20X7, a survey was carried out and it was discovered that the building had dry rot and substantial remedial work would be necessary. The buyer is prepared to wait for the work to be carried out but the property will not be sold until the problem has been rectified. This is not expected to occur until 20X9.

Required:

Can the property be classified as 'held for sale' in the financial statements of Cavenzi for the year ending 31 December 20X7?

Solution

The property cannot be classified as 'held for sale' as it is not available for immediate sale in its present condition. The property cannot be sold until the completion of the remedial work.

Illustration 2

A subsidiary entity, Johnson, is for sale at a price of $3 million. There has been some interest by prospective buyers but no sale as of yet. One buyer has made an offer of $2 million but the directors of the parent company rejected the offer as they were hoping to achieve a price of $3 million. The directors have just received advice from their accountants that the fair value of the business is $2.5 million. They have decided not to reduce the sale price of Johnson at the moment.

Required:

Can the subsidiary be classified as 'held for sale' under IFRS 5 Non-current assets held for sale and discontinued operations?

Solution

Although the parent company is actively trying to find a buyer, the subsidiary is not being marketed at a reasonable price in relation to its current fair value. The selling price is $3 million but the fair value is only $2.5 million. Therefore, the subsidiary cannot be classified as 'held for sale'.

Illustration 3

Jomas is planning to sell part of its business that is deemed to be a disposal group. The entity is in a business environment that is heavily regulated, and any sale requires government approval. This means that the sale time is difficult to determine. Government approval cannot be obtained until a buyer is found and known for the disposal group and a firm purchase contract has been signed.  As to date, a buyer has been found and a purchase contract has been signed. However, there is no indication of when the government approval will be granted.

Required:

Can the disposal group be classified as 'held for sale' in the financial statements of Jomas?

Solution

The signing of the contract is evidence that Jomas is committed to sell the disposal group. The delay in obtaining the government approval is caused by events and circumstances beyond the company's control. Therefore, provided all the other criteria under IFRS 5 is complied with, the disposal group should be classified as 'held for sale'.

Illustration 4

Aria has an asset that has been designated as 'held for sale' in the financial year to 31 December 20X5. During the financial year to 31 December 20X6, the asset still remains unsold, but the market conditions for the asset have deteriorated significantly. Aria believes that market conditions will improve and has not reduced the price of the asset, which continues to be classified as 'held for sale'. The fair value of the asset is $5 million, and the asset is being marketed at $7 million.

Required:

Should the asset be classified as 'held for sale' in the financial statements of Aria for the year ending 31 December 20X6?

Solution

The asset should cease to be classified as 'held for sale' under IFRS 5 for the year ending 31 December 20X6 because it is not being marketed at a reasonable price in relation to its current fair value. The fair value of the asset is only $5 million but it is being marketed at $7 million.