Question

give a worked numerical example that covers all the topics in Non current asset held for sale and discontinued operation, IFRS5. Please give numericals and not theory. thank you

Answer 1

1. Example

An entity has agreed in a directors’ meeting to sell a building, and has tentatively started looking for a buyer for the building. The price of the building has been fixed at $4m and a surveyor has valued the building based on market prices at $3.6m. The entity will continue to use the building until another building has been found with equivalent facilities, and in a suitable location for the office staff, who will not be relocated until the new building has been found.

Additionally, the entity is planning to sell part of its business and has actively marketed the business at a fair price but, before the business can be sold, government approval is required and any sale requires government approval. This means that the sale time is difficult to determine and it may take longer than one year to sell the disposal group.

Answer

The building will not be classified as held-for-sale as it is not available for immediate sale because, until new premises have been found, the office staff will remain in the existing building. Also, the directors have only tentatively started looking for a buyer which may indicate that the entity is not committed to the sale. Additionally, the price being asked for the building is above the market price, and is not reasonable compared to that price. It is unlikely that the entity will sell the building for that price.

The disposal group, however, would be classified as held-for-sale because the delay is caused by events or circumstances beyond the entity’s control, and there is evidence that the entity is committed to selling the disposal group.

Measurement of non-current assets which are held-for-sale

2. Example

An entity has stopped using certain plants because of a downturn in orders. It is maintaining the plant as the entity hopes that orders will pick up in future. Additionally, it intends to shut down one-half of its manufacturing base. The units to be closed constitute a major segment of its business and will close in the current financial year.

Answer

The equipment will not be treated as abandoned as it will subsequently be brought back into usage, and the manufacturing units will be treated as discontinued operations.

Discontinued operations: presentation and disclosure

A discontinued operation is a part of an entity that has either been disposed of or is classified as held-for-sale, and:

A. represents a separate major line of business or geographical area of operations

B. is part of a single co-ordinated plan to dispose of separate major lines of business or geographical area of operations, or

C. The subsidiary was acquired exclusively with a view to resale.

The total of the post-tax profit or loss of the discontinued operation, and the post-tax gain or loss recognised on the measurement to fair value less cost to sell (or on the disposal), should be presented as a single figure on the face of the income statement.

IFRS 5 requires detailed disclosure of revenue, expenses, pre-tax profit or loss, and the related income tax expense either in the notes or on the face of the income statement. If this information is presented on the face of the income statement, then the information should be separately disclosed from that of continuing operations.

As regards the presentation in the cash flow statement, the net cash flows attributable to the operating, investing and financing activities of the discontinued operation should be separately shown on the face of the cash flow statement or disclosed in the notes. Retrospective classification as a discontinued operation where the criteria are met after the balance sheet date is prohibited by IFRS 5.           

	Carrying value at 31 Dec 2006 $m
Goodwill	16
Property, plant and equipment	28
Inventory	20
Financial assets (profit of $4m recognised in equity)	17
Financial liabilities	(14)
	67

The property, plant and equipment and inventory were stated at deemed cost on moving to IFRS. Under IFRS, property, plant and equipment would be stated at $26m, and inventory stated at $18m. The fair value less costs to sell of the disposal group is $47m. Assume that the disposal group qualifies as held-for-sale.

Show how the disposal group would be accounted for in the financial statements for the year ended 31 December 2006.

	Carrying value $m	Re- measured $m	Impairment $m	Fair value less costs to sell $m
Goodwill	16	16	(16)	-
Property, plant and equipment	28	26		26
Inventory	20	18		18
Financial assets	17	17		17
Financial liabilities	(14)	(14)		(14)
	67	63	(16)	47

Answer

IFRS 5 requires that immediately before the initial classification of the disposal group as held-for-sale, the carrying amounts of the disposal group be measured in accordance with applicable IFRS, and any profit or loss dealt with under that IFRS.

The reduction in the carrying amount of property, plant and equipment will be dealt with in accordance with IAS 16, and that of the inventory in accordance with IAS 2.

After the re-measurement, the entity will recognise an impairment loss of $16m on re-measurement to the lower of carrying amount and fair value less cost to sell. This loss is allocated to goodwill in accordance with IAS 36.

Thus, goodwill will be reduced to zero. The loss will be charged against profit or loss.

In the balance sheet, the major classes of assets and liabilities classified as held-for-sale should be separately disclosed on the face of the balance sheet or in the notes. Thus, in this case, there would be separate disclosure of the disposal group as follows.