IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, is an accounting standard that outlines the accounting treatment for non-current assets that are either held for sale or have been disposed of as part of a discontinued operation. In this article, we will cover the rules and descriptions of IFRS 5, provide examples and case studies, and discuss new developments in this area.
Rules and Descriptions:
IFRS 5 defines non-current assets held for sale as assets that are available for immediate sale and that are expected to be sold within one year from the balance sheet date. The assets must also be actively marketed for sale at a price that is reasonable in relation to their fair value. Additionally, the sale of the assets must be highly probable.
IFRS 5 requires that non-current assets held for sale be measured at the lower of their carrying amount or fair value less costs to sell. Any impairment losses should be recognized immediately in profit or loss.
IFRS 5 also outlines the accounting treatment for discontinued operations. A discontinued operation is a component of an entity that has been disposed of or is classified as held for sale, and that represents a separate major line of business or geographical area of operations.
When a component is classified as a discontinued operation, the entity must disclose the amount of the gain or loss recognized on disposal, the net cash flows attributable to the component, and any significant expenses associated with the disposal.
Examples:
An example of non-current assets held for sale would be a factory that a company decides to sell because it no longer needs it. The factory is actively marketed for sale, and the company expects to sell it within one year. The carrying amount of the factory is $10 million, and the fair value less costs to sell is $8 million. The company would recognize an impairment loss of $2 million and measure the factory at $8 million on the balance sheet.
An example of a discontinued operation would be a restaurant chain that decides to sell one of its locations because it is not performing well. The restaurant is a major line of business, and its operations are separate from the rest of the chain. The company would classify the restaurant as a discontinued operation and disclose the gain or loss recognized on disposal, net cash flows, and any significant expenses associated with the disposal.
Case Studies:
In 2015, Nokia announced that it would sell its HERE mapping business to a consortium of German carmakers. Nokia classified HERE as a discontinued operation and recognized a gain of €1.2 billion on disposal. The company also disclosed the net cash flows of €2.5 billion and significant expenses associated with the disposal.
In 2019, Tesco, a UK-based supermarket chain, announced that it would sell its operations in Thailand and Malaysia. Tesco classified these operations as discontinued operations and recognized a gain of £5.2 billion on disposal. The company also disclosed the net cash flows of £8.2 billion and significant expenses associated with the disposal.
New Developments:
There have been no significant changes to IFRS 5 since its introduction in 2004. However, the International Accounting Standards Board (IASB) has issued several amendments to other standards that impact the accounting treatment of non-current assets held for sale and discontinued operations.
For example, in 2018, the IASB issued amendments to IAS 40, Investment Property, that require entities to transfer property to or from investment property when there is a change in use. If a property is held for sale, it should be classified as a non-current asset held for sale under IFRS 5.