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Background

IFRS 5 replaces IAS 35 Discontinuing Operations. The definition of discontinued operations is very much the same as the definition of discontinuing operations in IAS 35. However the timing of the classification now depends on when the discontinued operation satisfies the criteria to be classified as held for sale. The same requirement applies to non-current asset held for sale. Further, IFRS 5 requires the results of discontinued operations to be presented as a single amount on the face of the income statement. The Table Below compares IAS 35 and IFRS 5.

IFRS 5 achieves substantial convergence with the requirements of US SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets with respect to the timing of the classification of operations as discontinued operations and the presentation of such operations. With respect to long-lived assets that are not being disposed of, the impairment recognition and measurement standards in SFAS 144 are significantly different from those in IAS 36 Impairment of Assets. However those differences have not been addressed in the short-term convergence project.

Key Provisions of IFRS 5 Relating to Assets Held for Sale:

Held-for-sale classification. IFRS 5 establishes a classification for non-current assets 'held for sale' using the same criteria as those contained in US FASB Statement 144 Accounting for the Impairment or Disposal of Long-Lived Assets. In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for sale: [IFRS 5.6-8]

• management is committed to a plan to sell
• the asset is available for immediate sale
• an active programme to locate a buyer is initiated
• the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions)
• the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
• actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn.

The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition (but may be classified as discontinued once abandoned). [IFRS 5.13]

Disposal group. A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to dispose of in a single transaction. The measurement basis required for non-current assets classified as held for sale is applied to the group as a whole, and any resulting impairment loss reduces the carrying amount of the non-current assets in the disposal group in the order of allocation required by IAS 36. [IFRS 5.4]

Measurement. The following principles apply:

• At the time of classification as held for sale. Immediately before the initial classification of the asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable IFRSs. Resulting adjustments are also recognised in accordance with applicable IFRSs. [IFRS 5.18]

• After classification as held for sale. Non-current assets or disposal groups that are classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. [IFRS 5.15]

• Impairment. Impairment must be considered both at the time of classification as held for sale and subsequently:
  • At the time of classification as held for sale. Immediately prior to classifying an asset or disposal group as held for sale, measure and recognise impairment in accordance with the applicable IFRSs (generally IAS 16, IAS 36, IAS 38, and IAS 39). Any impairment loss is recognised in profit or loss unless the asset had been measured at revalued amount under IAS 16 or IAS 38, in which case the impairment is treated as a revaluation decrease.
  • After classification as held for sale. Calculate any impairment loss based on the difference between the adjusted carrying amounts of the asset/disposal group and fair value less costs to sell. Any impairment loss that arises by using the measurement principles in IFRS 5 must be recognised in profit or loss (IFRS 5.20), even for assets previously carried at revalued amounts. This is supported by IFRS 5 BC.47 and BC.48, which indicate the inconsistency with IAS 36.

• Assets carried at fair value prior to initial classification. For such assets, the requirement to deduct costs to sell from fair value will result in an immediate charge to profit or loss.

• Subsequent increases in fair value. A gain for any subsequent increase in fair value less costs to sell of an asset can be recognised in the profit or loss to the extent that it is not in excess of the cumulative impairment loss that has been recognised in accordance with IFRS 5 or previously in accordance with IAS 36. [IFRS 5.21-22]

Non-depreciation. Non-current assets or disposal groups that are classified as held for sale shall not be depreciated. [IFRS 5.25]

Balance sheet presentation. Assets classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale, must be presented separately on the face of the balance sheet. [IFRS 5.38]

Disclosures. [IFRS 5.41]

• Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale must be disclosed separately from other assets in the balance sheet.
• The liabilities of a disposal group classified as held for sale must also be disclosed separately from other liabilities in the balance sheet.
• There are also several other additional disclosures including a description of the nature of assets held and the facts and circumstances surrounding the sale.

Subsidiaries Held for Disposal

IFRS 5 applies to accounting for an investment in a subsidiary for which control is intended to be temporary because the subsidiary was acquired and is held exclusively with a view to its subsequent disposal in the near future. For such a subsidiary, if it is highly probable that the sale will be completed within 12 months then the parent should account for its investment in the subsidiary under IFRS 5 as an asset held for sale, rather than consolidate it under IAS 27.

However, IAS 27 still requires that if a subsidiary that had previously been consolidated is now being held for sale, the parent must continue to consolidate such a subsidiary until it is actually disposed of. It is not excluded from consolidation and reported as an asset held for sale under IFRS 5.

Key Provisions of IFRS 5 Relating to Discontinued Operations:

Classification as discontinuing. A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale, and: [IFRS 5.32]

• represents a separate major line of business or geographical area of operations,
• is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or
• is a subsidiary acquired exclusively with a view to resale.

Income statement presentation. The sum 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 fair value adjustments on the disposal of the assets (or disposal group) should be presented as a single amount on the face of the income statement. Detailed disclosure of revenue, expenses, pre-tax profit or loss, and related income taxes is required either in the notes or on the face of the income statement in a section distinct from continuing operations. Such detailed disclosures must cover both the current and all prior periods presented in the financial statements. [IFRS 5.33]

Cash flow statement presentation. The net cash flows attributable to the operating, investing, and financing activities of a discontinued operation shall be separately presented on the face of the cash flow statement or disclosed in the notes. [IFRS 5.33]

No retroactive classification. IFRS 5 prohibits the retroactive classification as a discontinued operation, when the discontinued criteria are met after the balance sheet date. [IFRS 5.12]

Disclosures.

In addition to the income statement and cash flow statement presentations noted above, the following disclosures are required:

• Adjustments made in the current period to amounts disclosed as a discontinued operation in prior periods must be separately disclosed. [IFRS 5.35]
• If an entity ceases to classify a component as held for sale, the results of that component previously presented in discontinued operations must be reclassified and included in income from continuing operations for all periods presented. [IFRS 5.36]

Effective Date and Transition

The standard must be applied prospectively for annual periods beginning on or after 1 January 2005, with earlier application permitted if sufficient information is available. In terms of IFRS 1, a first time adopter shall apply IFRS 5 retrospectively unless transition date is prior to 1 January 2005 in which case the transitional provisions apply. [IFRS 5.43-44]

Key Changes from IAS 35: