Senior Audit Assistant at RSM Poland
When keeping the accounting books, you come across many economic events you are obliged to correctly recognise in the financial statements at the end of the reporting period. Sometimes you come across unusual, less common events, such as inventory valuation or reserve recognition. Non-current assets held for sale and assets related to discontinued operations, regulated in detail in IFRS 5, are other examples here. Therefore, it is a good idea to think what criteria must be met for an asset or a disposal group to be classified as held for sale and thus properly measured and presented in financial statements.
According to IFRS 5, the entity classifies a non-current asset (or disposal group) as held for sale, if all of the following conditions are met (IFRS 5. 6-12):
- the asset (or disposal group) is available for immediate sale in its current condition,
- the sale is highly probable, which means that:
- management is committed to a plan to sell,
- an active programme to locate a buyer is initiated,
- the asset is being marketed for sale at a sale price reasonable in relation to its current fair value,
- the sale is highly probable within 12 months of classification of the asset as held for sale.
It is also worth keeping in mind that from the moment the asset is classified as a non-current asset held for sale, it is no longer depreciated.
The next step is appropriate measurement of the asset held for sale. Such an asset is measured either at the carrying amount or at fair value less the cost of sale, whichever is lower.
To give you a more complete picture of held for sale classification of the asset and its measurement, let us analyse the following case:
On 1 January 2018, the ”Alfa” company bought a wood cutting machine for PLN 20,000. The machine has an expected usable life of 10 years and zero residual value. On 30 September 2020, “Alfa” company decided to sell the machine and initiated a programme to locate a buyer. The supply of this type of machines is not large; hence the company was convinced that the machine would be sold soon. The market value as at 20 September 2020 is PLN 13,500. The dismantling of the machine to make it available to the buyer will cost PLN 500. At the end of the year, the machine has not been sold yet.
Considering all the above information, we can see that at 30 September 2020 all the criteria for classifying the non-current asset as held for sale are met. What is the value of the machine that should be presented in the financial statements of the “Alfa” company as at 31 December 2020?
Carrying amount at 30.09.2020
20,000:10 = 2,000
20,000 – 5,500 = 14,500
Fair value less the cost of sale
13,500 – 500 = 13,000
Since the machine’s fair value less the cost of sale is lower than its carrying amount, the company shall recognise the machine’s value at the amount of PLN 13,000 in the balance sheet at 31 December 2020, and the difference between these values (14,500 – 13,000 = 1,500) shall be carried to other impairment costs.
Presentation in financial statements
What should be remembered is that assets held for sale are presented separately from other assets and in single amounts (no balancing) (IFRS 5. 38).
If the entity sells a given non-current asset in the course of the year or classifies it as an asset held for sale which at the same time:
- represents either a separate major line of business or a geographical area of operations,
- is part of a co-ordinated plan to dispose of it,
- is a subsidiary acquired exclusively with a view to resale,
the post-tax result from discontinued operations shall be presented in the profit and loss account and in the additional information.
Summing up, the sale of high-value non-current assets constitutes material information and may significantly affect the decisions made by users of financial statements. For this reason, it is extremely important for entities holding such assets to apply the regulations under IFRS 5 and make it easier for users to assess financial consequences of discontinued operations. We encourage you to read other articles on (international) financial reporting, and should you have any questions, please contact our experts: firstname.lastname@example.org.
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