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Gripping IFRS

Non-current assets held for sale and discontinued operations

Chapter 9 Non-current Assets Held for Sale and Discontinued Operations


Reference: IFRS 5 Contents: 1. Introduction 2. Definitions 3. Non-current assets held for sale: identification 3.1 Overview 3.2 Criteria to be met before a non-current asset is classified as held for sale 3.2.1 General criteria 3.2.2 Criteria where a completed sale is not expected within one year 3.2.3 Criteria where the asset is acquired with the intention to sell 4. Non-current assets held for sale: measurement 4.1 General measurement principles 4.2 Measurement principles specific to the cost model 4.2.1 The basic principles when the cost model was used Example 1: reclassification of an asset measured using the cost model Example 2: reclassification of an asset measured using the cost model 4.2.2 The tax effect when the cost model was used Example 3: tax effect of reclassification and the cost model 4.3 Measurement principles specific to the revaluation model 4.3.1 The principles when the revaluation model was used Example 4: reclassification of an asset using the revaluation model Example 5: re-measurement of an asset held for sale, using the revaluation model 4.4 Reversal of classification as held for sale Example 6: re-measurement of assets no longer held for sale 5. Non-current assets held for sale: disclosure 5.1 Overview 5.2 In the statement of financial position 5.3 In the statement of financial position or notes thereto 5.4 Other note disclosure Example 7: disclosure of non-current assets held for sale 6. Discontinued operations: identification 7. Discontinued operations: measurement 8. Discontinued operations: disclosure 8.1 In the statement of comprehensive income 8.2 In the statement of cash flows 8.3 Other note disclosure 8.3.1 Components no longer held for sale 8.3.2 Criteria met after the end of the reporting period 9. Summary Page 310 310 311 311 311 311 311 312 312 312 313 313 313 315 316 316 317 317 318 320 321 322 322 322 322 323 323 323 325 325 326 326 327 328 328 328 329

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1. Introduction As its name suggests, this IFRS covers two areas, namely: non-current assets held for sale; and discontinued operations. With regard to non-current assets, this IFRS essentially suggests that there needs to be a further classification in the statement of financial position: non-current assets held for sale. In addition, it specifies that held for sale assets are not to be depreciated. This IFRS does not apply to the following assets since these assets are covered by their own specific standards: Deferred tax assets (IAS 12) Assets relating to employee benefits (IAS 19) Financial assets (IAS 39) Investment property measured under the fair value model (IAS 40) Non-current assets measured at fair value less point-of-sale costs (IAS 41: Agriculture) Contractual rights under insurance contracts (IFRS 4) 2. Definitions Definitions included in Appendix A of the IFRS include the following: Current asset: an asset - that is expected to be realised within 12 months after the end of the reporting period; - that is expected to be sold, used or realised (converted into cash) as part of the normal operating cycle; - that is held mainly for the purpose of being traded; or - that is a cash or cash equivalents that is not restricted in use within the 12 month period after the end of the reporting period. non-current asset: an asset that does not meet the definition of a current asset discontinued operation: a component of an entity that either has 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 a separate major line of business or geographical area of operations; or c) is a subsidiary acquired exclusively with view to resale. component of an entity: operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. disposal group: a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated in accordance with the requirements of paragraphs 80-87 of IAS 36 Impairment of Assets (as revised in 2004) or if it is an operation within a cash-generating unit. firm purchase commitment: an agreement with an unrelated party, binding on both parties and usually legally enforceable, that: a) specifies all significant terms, including the price and timing of the transactions; and b) includes a disincentive for non-performance that is sufficiently large to make performance highly probable. highly probable: significantly more likely than probable. probable: more likely than not.
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3. 3.1

Non-current assets held for sale: identification (IFRS 5.6 - .12) Overview

The main thrust of IFRS 5 is that non-current assets that are held for sale must be classified separately in the statement of financial position (i.e. a machine that is held for sale will no longer be included as part of property, plant and equipment). Certain criteria must first be met before a non-current asset is classified as a non-current asset held for sale. 3.2 Criteria to be met before a non-current asset is classified as held for sale

3.2.1 General criteria A non-current asset (or disposal group) must be classified as held for sale if its carrying amount will be recovered mainly through a sale transaction than through continuing use. Non-current assets that meet all the following criteria may be separately classified as noncurrent assets held for sale: Is the asset available for sale immediately and at normal terms? The asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups); Has management committed itself to a sales plan? Management, with the necessary authority to approve the action, must have committed itself to a plan to sell; Has an active programme to sell begun? The active programme must be to both locate a buyer and to complete the plan to sell the asset (or disposal group); Is the sale expected to happen within one year? The sale must be expected to qualify for recognition as a completed sale within one year from the date of classification as held for sale, except as permitted by paragraph 9 and appendix B; Is the expected selling price reasonable? The asset (or disposal group) must be actively marketed at a price that is reasonable in relation to its current fair value; and Is it unlikely that significant changes to the plan will be made? The actions required to complete the plan must indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. This means that assets that are to be abandoned should not be classified and measured as held for sale since their carrying amount will be recovered principally through continuing use (until date of abandonment) rather than through a sale. This means that depreciation on assets that are to be abandoned should not cease. 3.2.2 Criteria where a completed sale is not expected within one year (Appendix B) There may be occasions where the asset would still be held for sale even though the sale may not be completed and recognised as a sale within one year. This happens when: At the date that the entity commits itself to a plan to sell a non-current asset (or disposal group), it reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset (or disposal group) that will extend the period required to complete the sale, and: - actions necessary to respond to those conditions cannot be initiated until after a firm purchase commitment is obtained, and - a firm purchase commitment is highly probable within one year. An entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly impose conditions on the transfer of a non-current asset (or disposal group) previously classified as held for sale that will extend the period required to complete the sale, and: - timely actions necessary to respond to the conditions have been taken, and - a favourable resolution of the delaying factors is expected.
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During the initial one-year period, circumstances arise that were previously considered unlikely and, as a result, a non-current asset (or disposal group) previously classified as held for sale is not sold by the end of the period, and: - during the initial one-year period the entity took action necessary to respond to the change in circumstances, - the non-current asset (or disposal group) is being actively marketed at a price that is reasonable, given the change in circumstances, and - the criteria in paragraph 7 (that sets out that the asset must be available for immediate sale) and paragraph 8 (that sets out that the sale must be highly probable) are met.

3.2.3 Criteria where the asset is acquired with the intention to sell (IFRS 5.11) It may happen that an entity acquires a non-current asset (or disposal group) exclusively with the view to its subsequent disposal. In this case, the non-current asset must be classified as held for sale immediately on acquisition date, on condition that: the one-year requirement is met (unless a longer period is allowed by paragraph 9 and the related appendix B); and it is highly probable that any other criteria given in para 7 and para 8 that are not met immediately on the date of acquisition, will be met within a short period (usually three months) after acquisition. 4. 4.1 Non-current assets held for sale: measurement (IFRS 5.15 - .25) General measurement principles

An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell. If a newly acquired asset (or disposal group) meets the criteria to be classified as held for sale, applying paragraph 15 will result in the asset being measured on initial recognition at the lower of its carrying amount had it not been so classified (e.g. cost) and fair value less costs to sell. Since the asset is newly acquired, its cost will equal its fair value. Therefore, an asset acquired as part of a business combination, shall initially be measured at fair value (its cost) less costs to sell. For all other assets (other than newly acquired assets) that are classified as non-current assets held for sale, there are two distinct phases of its life: Before it was classified as held for sale; and Once it is classified as held for sale. Before an asset is classified as held for sale, it is measured in terms of its own relevant IFRS. If, for example, the asset is an item of property, plant and equipment, the asset will have been measured in terms of IAS 16, which will mean that: on initial acquisition, the asset will have been recorded at cost; and subsequently, the asset will have been depreciated, revalued (if the revaluation model was used to measure the asset) and reviewed for impairments annually (whether the cost or revaluation model were used). If this asset is then to be reclassified as held for sale, it will be measured as follows: In terms of its previous relevant IFRS: Immediately before reclassifying the asset as held for sale, the asset must be remeasured using its previous measurement model; for example if the asset was previously an item of property, plant and equipment that was measured using the: Cost model: depreciate to date of reclassification and then check for impairments; or Revaluation model: depreciate to date of reclassification, revalue if appropriate and check for impairments; then

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In terms of IFRS 5: On reclassifying the asset as held for sale, - re-measure to the lower of carrying amount and fair value less costs to sell; and - stop depreciating it.

If, in the unusual instance a sale is not expected to occur within one year, it may be necessary (depending on materiality) to measure the costs to sell at their present value. 4.2 Measurement principles specific to the cost model

4.2.1 The basic principles when the cost model was used If an asset measured under the cost model is re-classified as held for sale: immediately before reclassifying the asset as held for sale, the asset must be remeasured using its previous measurement model (i.e. the cost model per IAS 16, if the item was previously property, plant and equipment); then, in terms of IFRS 5: - re-measure it to the lower of carrying amount and fair value less costs to sell; - stop depreciating it; and - re-measure to fair value less costs to sell whenever appropriate: any impairment loss will be expensed in the statement of comprehensive income whereas impairment losses reversed are recognised as income but are limited to the assets accumulated impairment losses. You may have noticed that, when using the cost model, there can be no initial increase in the carrying amount on classification as held for sale because the non-current asset must initially be measured at the lower of its carrying amount and fair value less costs to sell. For example, an asset with a carrying amount of 80 000 and fair value less costs to sell of 90 000 will not be adjusted because the lower of the two is the current carrying amount of 80 000. Example 1: reclassification of an asset measured using the cost model An item of plant, measured using the cost model, has a carrying amount of C80 000 (cost: 100 000 and accumulated depreciation: 20 000) on 1 January 20X3 on which date all criteria for separate classification as a non-current asset held for sale are met. Required: Show the journal entries relating to the reclassification of the plant assuming that: A. the fair value is C70 000 and the expected costs to sell are C5 000 on 1 January 20X3; B. on 30 June 20X3 (6-months later), the fair value is C70 000 and expected costs to sell are C2 000; C. on 30 June 20X3 (6-months later), the fair value is C90 000 and expected costs to sell are C5 000. Solution to example 1: reclassification of an asset using the cost model
Comment: this example explains the limit to the reversal of the impairment loss. A. If carrying amount > fair value less costs to sell: recognise an impairment loss (expense) Workings: Carrying amount Fair value less costs to sell: Decrease in value (impairment loss) given 70 000 5 000 80 000 65 000 C 80 000 (65 000) 15 000

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Journal: 1 January 20X3 Impairment loss (expense) - Plant: accumulated impairment loss Impairment loss before initial classification as held for sale Note: There is no depreciation on this asset.

Debit 15 000

Credit

15 000

B. If fair value less costs to sell subsequently increases: recognise a reversal of impairment loss (income) limited to accumulated impairment losses Workings: New fair value less costs to sell: Prior fair value less costs to sell: Impairment loss reversed*:
70 000 2 000 100 000 cost 20 000 accum depreciation 15 000 impairment loss 68 000 65 000

C 68 000 (65 000) 3 000

* Note: the accumulated impairment loss is 15 000 before the reversal, thus the reversal of 3 000 is not limited (the previous accumulated impairment loss is bigger: 15 000 is bigger than 3 000). Journal: 30 June 20X3 Plant: accumulated impairment loss - Impairment loss reversed (income) Reversal of impairment loss: on re-measurement of NCA held for sale Debit 3 000 3 000 Credit

Note: There is no depreciation on this asset. The impairment to date is C12 000 (15 000 3 000)

C. If fair value less costs to sell subsequently increases: recognise a reversal of impairment loss (income) limited to accumulated impairment losses Workings: New fair value less costs to sell: Prior fair value less costs to sell
90 000 5 000 100 000 20 000 accum depreciation 15 000 impairment loss

C 85 000 (65 000) 20 000 15 000 15 000

Increase in value Limited to prior cumulative impairment losses Impairment loss reversed*: 85 000 65 000 = 20 000 limited to 15 000

* Note: the difference between the latest fair value less costs to sell (85 000) and the prior fair value less costs to sell (65 000) of 20 000 is limited to the previous accumulated impairment loss of 15 000. Journal: 30 June 20X3 Plant: accumulated impairment loss - Impairment loss reversed (income) Reversal of impairment loss on re-measurement of non-current asset held for sale Debit 15 000 15 000 Credit

Note: There is no depreciation on this asset. The impairment to date is C0 (15 000 15 000)

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Example 2: reclassification of an asset measured using the cost model An item of plant, measured using the cost model (i.e. at historical carrying amount), has a carrying amount of 80 000 (cost 100 000) on 1 January 20X3 on which date all criteria for separate classification as a non-current asset held for sale are met. This asset had previously been impaired by 3 000 (i.e. this is the balance on the accumulated impairment loss account). Required: Show the journal entries relating to the reclassification of the plant assuming: A. the fair value is 70 000 and the expected costs to sell are 5 000 on 1 January 20X3; B. 6 months later, on 30 June 20X3, the fair value is 70 000 and the expected costs to sell are 2 000; C. 6 months later, on 30 June 20X3, the fair value is 90 000 and the expected costs to sell are 5 000. Solution to example 2: reclassification of an asset measured using the cost model
Comment: this example explains the limit to the reversal of the impairment loss. It differs from the previous example in that this asset had previously been impaired before it was reclassified as a noncurrent asset held for sale. A. If carrying amount > fair value less costs to sell: recognise an impairment loss (expense) Workings: Carrying amount Fair value less costs to sell: Decrease in value (impairment loss) C 80 000 (65 000) 15 000 Debit 15 000 Credit 15 000

given 70 000 5 000 80 000 65 000

Journal: 1 January 20X3 Impairment loss (expense) - Plant: accumulated impairment loss Impairment loss on initial classification of NCA as held for sale

Note: There is no depreciation on this asset. The impairment to date is now C18 000 (3 000 + 15 000) B. If fair value less costs to sell subsequently increases: recognise a reversal of impairment loss (income) limited to accumulated impairment losses Workings: New fair value less costs to sell Prior fair value less costs to sell Increase in value (impairment loss reversed*) 70 000 2 000 70 000 5 000 68 000 65 000 C 68 000 (65 000) 3 000

* Note: the accumulated impairment loss is 18 000 before this reversal (15 000 + 3 000), therefore the impairment loss reversal of 3 000 is not limited (the previous accumulated impairment loss is bigger: 18 000 is bigger than 3 000). Journal: 30 June 20X3 Plant: accumulated impairment loss - Impairment loss reversed (income) Reversal of impairment loss on re-measurement of asset held for sale Debit 3 000 3 000 Credit

Note: There is no depreciation on this asset. The impairment to date is now C15 000 (18 000 - 3 000)

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C. If fair value less costs to sell subsequently increases: recognise a reversal of impairment loss (income) limited to accumulated impairment losses Workings: New fair value less costs to sell: Prior fair value less costs to sell Increase in value Limited to prior cumulative impairment losses Impairment loss reversed*:
90 000 5 000 70 000 5 000 15 000 + 3 000 85 000 65 000 = 20 000 limited to 15 000

C 85 000 (65 000) 20 000 18 000 18 000

* Note: The difference between the latest fair value less costs to sell and the prior fair value less costs to sell of 20 000 is limited to the cumulative impairment loss recognised of 18 000, calculated as follows: C Impairment loss: 18 000 - before reclassification given 3 000 - on reclassification 80 000 65 000 15 000

Journal: 30 June 20X3 Plant: accumulated impairment loss - Impairment loss reversed (income) Reversal of impairment loss on re-measurement of asset held for sale

Debit 18 000

Credit

18 000

Note: There is no depreciation on this asset. The impairment to date is now C0 (18 000 - 18 000)

4.2.2 The tax effect when the cost model was used As soon as an asset is classified as held for sale, depreciation thereon ceases. The tax authorities, however, do not stop deducting tax allowances (where tax allowances were due in terms of the tax legislation) simply because you have decided to sell the asset. The difference between the nil depreciation and the tax allowance (if appropriate) causes deferred tax. The principles affecting the current tax payable and deferred tax balances are therefore exactly the same as for any other non-current asset. Example 3: tax effect of reclassification and the cost model An item of plant, measured using the cost model (i.e. at historical carrying amount), has a carrying amount of C70 000 (cost 100 000) and a tax base of C90 000 on 1 January 20X3 on which date all criteria for separate classification as a non-current asset held for sale are met. The fair value less costs to sell on this date are C65 000. This asset had not previously been impaired. The tax authorities allow a deduction of 10% on the cost of this asset. The tax rate is 30%. The profit before tax is correctly calculated to be C200 000. There are no temporary or permanent differences other than those evident from the information provided. Required: A. Calculate the current normal tax payable and the deferred tax balance at 31 December 20X3. B. Journalise the current normal tax and the deferred tax for the year ended 31 December 20X3.

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Solution to example 3: tax effect of reclassification and the cost model


A: Calculations Current normal income tax Profit before tax Add back depreciation Add back impairment Less tax allowance Taxable profits Current tax Calculations C 200 000 0 5 000 (10 000) 195 000 58 500 Deferred tax 6 000 (1 500) 15 000 4 500
Asset Cr DT, Dr TE Asset

Assets held for sale are not depreciated Impairment on re-classification as held for sale 100 000 x 10% 195 000 x 30% Carrying amount 70 000 (5 000) 0 65 000 Tax base 90 000 0 (10 000) 80 000 Temporary difference 20 000

Deferred tax: Non-current asset held for sale Balance 1 January 20X3 Less impairment to fair value costs to sell (70 000 65 000) Depreciation/ tax allowance Balance 31 December 20X3 B: Journals 31 December 20X3 Tax expense Current tax payable (liability) Current normal tax payable (estimated) Tax expense Deferred tax (liability) Deferred tax adjustment

Debit 58 500

Credit

58 500

1 500 1 500

4.3

Measurement principles specific to the revaluation model

4.3.1 The principles when the revaluation model was used If an asset measured under the revaluation model is reclassified as held for sale: immediately before reclassifying the asset as held for sale, the asset must be remeasured using its previous measurement model (i.e. the revaluation model per IAS 16); then, in terms of IFRS 5: - re-measure it to the lower of carrying amount and fair value less costs to sell; - stop depreciating it; and - then re-measure it to fair value less costs to sell whenever appropriate: any further impairment loss (e.g. the selling costs) is expensed (even if there is a revaluation surplus) whereas an impairment loss reversed is recognised as income but is limited to the assets accumulated impairment losses.

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Example 4: reclassification of an asset measured using the revaluation model An item of plant, revalued to fair value using the revaluation model, met all criteria for classification as held for sale on 1 January 20X4. The following information is relevant: Cost: 100 000 (purchased 1 January 20X1) Depreciation: 10% per annum straight-line to nil residual values. Fair value: 120 000 (revalued 1 January 20X3). Revaluations are performed using the net replacement value method Required: Show all journal entries relating to the reclassification as held for sale assuming that: A. The fair value is C100 000 and the expected selling costs are C9 000 on 1 January 20X4; B. The fair value is C150 000 and the expected selling costs are C20 000 on 1 January 20X4. C. The fair value is C60 000 and the expected selling costs are C20 000 on 1 January 20X4. Solution to example 4: reclassification of an asset measured using the revaluation model
A. If the actual carrying amount > historical carrying amount (i.e. there is already a revaluation surplus) and the fair value decreases on date of reclassification (although not entirely removing the revaluation surplus balance) and there are costs to sell: reverse revaluation surplus due to drop in fair value and recognise selling costs as an impairment loss (expense) Workings: Fair value (1 January 20X3) Accumulated depreciation (31 December 20X3: since the revaluation on 1 January 20X3) Actual carrying amount (1 January 20X4): Fair value Decrease in value (all through revaluation surplus) Actual carrying amount (1 January 20X4): Historical carrying amount (1 January 20X4) Balance on the revaluation surplus (1 January 20X4): Decrease in value (above) Balance on the revaluation surplus (1 January 20X4): C
120 000 (15 000) 105 000 (100 000) 5 000 105 000 (70 000) 35 000 (5 000) 30 000

120 000/ 8 remaining years 120 000 15 000 Given See below for calculation of RS balance 120 000 15 000 (above) 100 000/ 10 years x 7 years Proof: (120 000 80 000) / 8 x 7 years Further balance against which further devaluation would be processed (IAS16)

Journals: 1 January 20X4 Plant: accumulated depreciation and impairment losses - Plant: cost NRVM: Accumulated depreciation set-off against cost Revaluation surplus FV: C100 000 Carrying amount: C105 000 - Plant: cost Re-measurement to FV before reclassification Impairment loss (selling costs) (expense) - Plant: accumulated depreciation and impairment losses Re-measurement to lower of CA or FV less costs to sell on reclassification: CA: 100 000 FV less Costs to Sell: (100 000 9 000) Note: There is no further depreciation on this asset.

Debit 15 000

Credit

15 000

5 000 5 000

9 000 9 000

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B. If the actual carrying amount > historical carrying amount (i.e. there is already a revaluation surplus) and fair value increases and there are expected costs to sell: increase revaluation surplus due to increase in fair value and recognise the expected selling costs as an impairment loss (expense) Workings: Fair value Accumulated depreciation (31 December 20X3: since the revaluation on 1 January 20X3) Actual carrying amount (1 January 20X4): Fair value Increase in value (all through revaluation surplus) C 120 000 (15 000) 105 000 150 000 (45 000)

120 000/ 8 remaining years 120 000 15 000 given Through revaluation surplus because carrying amount is already above the HCA: 100 000 / 10 x 7

Journals: 1 January 20X4 Plant: accumulated depreciation and impairment losses - Plant: cost NRVM: Accumulated depreciation set-off against cost: 120 000/ 8 years remaining on date of revaluation Plant: cost - Revaluation surplus Re-measurement to FV before reclassification: FV: 150 000 Carrying amount: 105 000 Impairment loss (selling costs) (expense) - Plant: accumulated depreciation and impairment losses Re-measurement to lower of CA or FV less costs to sell on reclassification: Carrying amount: 150 000 FV less costs to sell: (150 000 20 000) Note: There is no further depreciation on this asset.

Debit 15 000

Credit 15 000

45 000 45 000

20 000 20 000

C. If the actual carrying amount > historical carrying amount (i.e. there is already a revaluation surplus) and fair value decreases removing the entire balance on the revaluation surplus and there are expected costs to sell: reverse revaluation surplus due to decrease in fair value and recognise the expected selling costs as an impairment loss (expense)
Workings: Fair value Accumulated depreciation (31 December 20X3: since the revaluation on 1 January 20X3) Actual carrying amount (1 January 20X4): Fair value Decrease in value (all through revaluation surplus) Actual carrying amount (1 January 20X4): Historical carrying amount (1 January 20X4) Balance on the revaluation surplus (1 January 20X4): Decrease in value (above) Reversal: revaluation surplus balance Impairment loss (balancing figure)
120 000/ 8 years 120 000 15 000 given See below for calculation of RS bal 120 000 15 000 100 000/ 10years x 7 years (120 000 80 000) / 8 x 7 years Balance in this account (above) 45 000 35 000

C 120 000 (15 000) 105 000 (60 000) 45 000 105 000 (70 000) 35 000 45 000 35 000 10 000

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Journals: 1 January 20X4 Plant: accumulated depreciation and impairment losses - Plant: cost NRVM: Accumulated depreciation set-off against cost: 120 000/ 8 years remaining on date of revaluation Revaluation surplus (ACA: 105 000 HCA: 70 000) Impairment loss (HCA: 70 000 FV: 60 000) - Plant: cost - Plant: accumulated depreciation and impairment losses Re-measurement to FV before reclassification: FV: 60 000 CA: 105 000 Impairment loss (selling costs) (expense) - Plant: accumulated depreciation and impairment losses Re-measurement to lower of CA or FV less costs to sell on reclassification: CA: 60 000 FV less costs to sell (60 000 20 000) Note: There is no further depreciation on this asset.

Debit 15 000

Credit

15 000

35 000 10 000 35 000 10 000 20 000 20 000

Example 5: re-measurement of an asset held for sale using the revaluation model An item of plant, revalued to fair value using the revaluation model, met all criteria for classification as held for sale on 1 January 20X4. The following information is relevant: Cost: 100 000 (purchased 1 January 20X1) Depreciation: 10% per annum straight-line to nil residual values. Fair value: 120 000 (revalued 1 January 20X3). Revaluations are performed using the net replacement value method The fair value less costs to sell on 1 January 20X4 was as follows: Fair value (1 January 20X4): 100 000; and Expected selling costs (1 January 20X4): 9 000. Required: Show all journal entries relating to the re-measurement of the non-current asset held for sale on 30 June 20X4 assuming that on the 30 June 20X4: A. The fair value is 110 000 and the expected selling costs are 15 000; B. The fair value is C110 000 and the expected selling costs are C3 000; C. The fair value is 90 000 and the expected selling costs are 3 000. Solution to example 5: re-measurement of an asset held for sale: the revaluation model
Comment: this example explains the limit on the impairment loss that may be reversed. A. If the new fair value less costs to sell > previous fair value less costs to sell: reverse the impairment loss limited to prior cumulative impairment losses C
110 000 (FV) 15 000 (cost to sell) 100 000 (FV) 9 000 (costs to sell) 100 000 (FV before reclassification) 91 000 (FV costs to sell) Maximum that may be reversed is 9 000; thus there is no limitation to the reversal in this case

Workings: New fair value less costs to sell (30 June 20X4) Prior fair value less costs to sell (1 January 20X4) Increase in value Limited to prior cumulative impairment losses Therefore: impairment loss reversed

95 000 (91 000) 4 000 9 000 4 000

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Journals: 30 June 20X4 Plant: accumulated depreciation and impairment losses - Impairment loss reversed (income) Re-measurement of non-current asset held for sale: increase in fair value less costs to sell

Debit 4 000

Credit 4 000

B.

If the new fair value less costs to sell > previous fair value less costs to sell: reverse the impairment loss limited to prior cumulative impairment losses C
110 000 (FV) 3 000 (cost to sell) 100 000 (FV) 9 000 (costs to sell) 100 000 (FV before reclassification) 91 000 (FV costs to sell)

Workings: New fair value less costs to sell (30 June 20X4) Prior fair value less costs to sell (1 January 20X4) Increase in value Limited to prior cumulative impairment losses Therefore: reversal of impairment loss Journals: 30 June 20X4 Plant: accumulated impairment loss - Reversal of impairment loss (income) Re-measurement of non-current asset held for sale: increase in fair value less costs to sell (limited to 9 000) Debit 9 000

107 000 (91 000) 16 000 9 000 9 000 Credit 9 000

C.

If the new fair value less costs to sell < previous fair value less costs to sell: recognise a further impairment loss C
90 000 (FV) 3 000 (cost to sell) 100 000 (FV) 9 000 (costs to sell)

Workings: New fair value less costs to sell (30 June 20X4) Prior fair value less costs to sell (1 January 20X4) Decrease in value (impairment loss) Journals: 30 June 20X4 Impairment loss (expense) - Plant: accumulated depreciation and impairment losses Re-measurement of non-current asset held for sale: decrease in fair value less costs to sell

87 000 91 000 4 000 Credit 4 000

Debit 4 000

4.4

Reversal of classification as held for sale (IFRS 5.26 - .29)

If a non-current asset that was previously classified as held for sale no longer meets the criteria necessary for such a classification, the asset must immediately cease to be classified as held for sale and must be re-measured to the lower of: its carrying amount had the non-current asset never been classified as held for sale(adjusted for any depreciation, amortisation and/ or revaluations that would have been recognised had the asset not been classified as held for sale); and its recoverable amount.

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Example 6: re-measurement of assets no longer classified as held for sale Plant, with a cost of C100 000 (1 January 20X1) and accumulated depreciation of C20 000 on 31 December 20X2 (10% straight-line for 2 years), was reclassified as held for sale on 31 December 20X2 and immediately impaired to its fair value less costs to sell of C65 000. On 30 June 20X3 (six months later), it ceased to meet all criteria necessary for classification as held for sale. On this date its recoverable amount is determined to be C85 000. Required: Show all journal entries relating to the re-measurement of plant previously held as a noncurrent asset held for sale. Solution to example 6: re-measurement of assets no longer classified as held for sale
Workings: New carrying amount (30 June 20X3) to be lower of: Carrying amount had the asset never 100 000 20 000 100 000 x 10% x 6/12 been classified as held for sale Recoverable amount Given Current carrying amount (30 June 20X3) Fair value costs to sell Impairment loss to be reversed Journals: 30 June 20X3 Plant: accumulated impairment loss - Impairment loss reversed (income) Reversal of impairment loss on reclassification of non-current asset held for sale as property, plant and equipment: criteria no longer met Note: Depreciation on this asset will now begin again. Debit C 75 000 75 000 85 000 (65 000) 10 000 Credit

10 000 10 000

5. 5.1

Non-current assets held for sale: disclosure (IFRS 5.30 and .38 - .42) Overview

Extra disclosure is required where the financial statements include either: a non-current asset held for sale; or a sale of a non-current asset. The classification affects the period during which it was classified as held for sale. This means that no adjustment should be made to the measurement or presentation of the affected assets in the comparative periods presented. 5.2 In the statement of financial position

Non-current assets (or non-current assets within a disposal group) that are held for sale must be shown separately in the statement of financial position. If a disposal group includes liabilities, these liabilities must also be shown separately from other liabilities in the statement of financial position and may not be set-off against the assets within the disposal group.

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5.3

In the statement of financial position or notes thereto

Major classifications of assets within the total of the non-current assets held for sale and major classifications of liabilities within the total liabilities of a disposal group must be shown in the notes (unless shown in the statement of financial position). 5.4 Other note disclosure

An entity shall disclose the following information in the notes in the period in which a noncurrent asset (or disposal group) has been classified as held for sale or sold: a) a description of the non-current asset (or disposal group); b) a description of the facts and circumstances of the sale, or leading to the expected disposal, and the expected manner and timing of that disposal; c) the gain or loss recognised in accordance with IFRS 5 (paragraph 20-22) and, if not separately presented in the statement of comprehensive income, the caption in the statement of comprehensive income that includes that gain or loss; d) if applicable, the segment in which the non-current asset (or disposal group) is presented in accordance with IAS 14 Segment Reporting. If, during the current period, there was a decision to reverse the plan to sell the non-current asset (or disposal group), the following extra disclosure would be required: a) the description of the facts and circumstances leading to the decision not to sell; and b) the effect of the decision on the results of operations for all periods presented. Example 7: disclosure of non-current assets held for sale Assume that an entity owns only the following non-current assets: Plant; and Factory buildings. Details of the plant are as follows: Plant was purchased on 1 January 20X1 at a cost of C100 000; Depreciation is provided over 10 years to a nil residual value on the straight-line basis; Plant was reclassified as held for sale on 31 December 20X2 and immediately impaired to its fair value less costs to sell of C65 000; On 30 June 20X3 (six months later), plant ceased to meet all criteria necessary for classification as held for sale, on which date its recoverable amount is C85 000. Details of the factory buildings are as follows: The factory buildings were purchased on 1 January 20X1 at a cost of C600 000, Depreciation is provided over 10 years to nil residual values on the straight-line basis Factory buildings were reclassified as held for sale on 30 June 20X3 at a fair value less cost to sell of C445 000. Required: Disclose all information necessary in relation to the plant and factory buildings in the financial statements for the year ended 31 December 20X3.

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Solution to example 7: disclosure of non-current assets held for sale


Comment: this example explains how to disclose non-current assets held for sale, as well as how to disclose a non-current asset that is no longer held for sale. Company name Statement of financial position At 31 December 20X3 Non-current assets Property, plant and equipment Non-current assets (and disposal groups) held for sale Non-current liabilities Liabilities of a disposal group (for disclosure purposes only) Company name Notes to the financial statements For the year ended 31 December 20X3 20X3 C 5. Profit before tax Profit before tax is stated after taking into consideration the following (income)/ expenses: Depreciation factory building Depreciation plant Impairment loss asset held for sale Impairment loss reversed asset no longer held for sale 26. Property, plant and equipment Factory building Plant Factory building: Net carrying amount 1 January Gross carrying amount 1 January Accumulated depreciation and impairment losses 1 January Depreciation (to 30 June 20X5) Impairment loss (to fair value less costs to sell: 450 000 445 000) Non-current asset now classified as held for sale Net carrying amount 31 December Gross carrying amount 31 December Accumulated depreciation and impairment losses 31 December Plant: Net carrying amount 1 January Gross carrying amount 1 January Accumulated depreciation and impairment losses 1 January Non-current asset no longer classified as held for sale Reversal of impairment loss (to lower of HCA: 75 000 or RA:85 000) Depreciation (20X3: 75 000 / 7,5 remaining years x 6/12) Impairment loss (to fair value less costs to sell: 80 000 65 000) Non-current asset now classified as held for sale Net carrying amount 31 December Gross carrying amount 31 December Accumulated depreciation and impairment losses 31 December 324 0 70 000 70 000 480 000 600 000 (120 000) (30 000) (5 000) (445 000) 0 0 0 0 0 0 65 000 10 000 (5 000) 0 0 70 000 100 000 (30 000) 480 000 0 480 000 540 000 600 000 (60 000) (60 000) 0 0 480 000 600 000 (120 000) 90 000 100 000 (10 000) 0 0 (10 000) (15 000) (65 000) 0 0 0 Chapter 9 30 000 5 000 5 000 (10 000) 60 000 10 000 15 000 0 20X2 C 20X3 C 70 000 445 000 xxx 20X2 C 480 000 65 000 xxx

26 27 27

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27. Non-current assets held for sale Factory buildings Plant Less non-current interest bearing liabilities (disclosure purpose)

20X3 C 445 000 0 0 445 000

20X2 C 0 65 000 0 65 000

The company is transferring its business to a new location and thus the existing factory building is to be sold (circumstances leading to the decision). The sale is expected to take place within 7 months of the end of the reporting period (expected timing). The factory building is expected to be sold as a going concern (expected manner of sale). The plant is no longer classified as held for sale since it is now intended to be redeployed to other existing factories rather than to be sold together with the factory buildings (reasons for the decision not to sell). The effect on current year profit from operations is as follows: - Gross (Impairment loss reversed: 10 000 deprec.:5 000) - Tax - Net C 5 000 (1 500) 3 500

6. Discontinued operations: identification (IAS 5.31 - .36) IFRS 5 requires that, where a component is identified as a discontinued operation, it must be separately disclosed in the financial statements. The following definitions are provided in IFRS 5: A component of an entity comprise: operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity may be a cash-generating unit or any group thereof. A discontinued operation is a component of an entity that has either been - disposed of, or - is classified as held for sale; and meets one of the following criteria: - represents a separate major line of business or geographical area of operations; or - 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.

7. Discontinued operations: measurement A discontinued operation is, in effect, constituted by non-current assets (or disposal groups) held for sale that, together, comprise a component that meets the definition of a discontinued operation. Therefore, the principles that are adopted when measuring the individual noncurrent assets (or disposal groups) held for sale are also used when measuring the elements of a discontinued operation. If the non-current asset (or disposal group) does not meet the definition of a component, the related transactions and adjustments will not be disclosed as discontinued operations but rather as part of continuing operations.
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8. Discontinued operations: disclosure 8.1 In the statement of comprehensive income

A single amount must be presented on the face of the statement of comprehensive income being the total of: the post-tax profit or loss of the discontinued operations; the post-tax gain or loss recognised on measurement to fair value less costs to sell; and the post-tax gain or loss recognised on disposal of assets/ disposal groups making up the discontinued operations. An analysis of this single amount that is presented in the statement of comprehensive income must be presented for all periods presented. This analysis may be done in the statement of comprehensive income (see suggested presentation option A on the next page) or in the notes (see suggested presentation option B on the next page) and must show the following: revenue of discontinued operations; expenses of discontinued operations; profit (or loss) before tax of discontinued operations; and tax expense of discontinued operations. An entity must also disclose the following either in the statement of comprehensive income or in the notes thereto for all periods presented (with the exception of the change in estimate): gain or loss on re-measurement to fair value less selling costs; gain or loss on disposal of the discontinued operation (made up by assets/ disposal groups); tax effects of the above; and changes to estimates made in respect of discontinued operations disposed of in a prior period (showing nature and amount); examples of such changes include outcomes of previous uncertainties relating to: - the disposal transaction (e.g. adjustments to the selling price); and - the operations of the component before its disposal (e.g. adjustments to warranty/ legal obligations retained by the entity). Option A: If the analysis of the profit or loss is presented on the face of the statement of comprehensive income, the statement of comprehensive income will look something like this (the figures are all assumed): Example Ltd Statement of comprehensive income For the year ended 31 December 20X3 (extracts)
20X3 C000 Continuing 800 (300) 500 (150) 20X3 C000 Discontinued 150 (100) 50 (60) 40 30 20 (10) 350 0 350 30 0 30 380 0 380 220 0 220 20X3 C000 Total 20X2 C000 Continuing 800 (400) 400 (180) 20X2 C000 Discontinued 790 (500) 290 (97) 7 10 0 (3) 200 0 200 420 0 420 20X2 C000 Total

Revenue Expenses Profit before tax Taxation expense Gains/ (losses) after tax Gain/ (loss): re-measurement to fair value less costs to sell Gain/ (loss): disposal of assets in the discontinued operations Tax on gains/ (losses) Profit for the period Other comprehensive income Total comprehensive income

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Option B: If the total profit or loss is presented in the statement of comprehensive income, with the analysis in the notes, the statement of comprehensive income and notes will look something like this (the figures are all assumed):
Example Ltd Statement of comprehensive income For the year ended 31 December 20X3 (extracts) Note Revenue Expenses Profit before tax Taxation expense Profit from continuing operations Profit from discontinued operations Profit for the period Other comprehensive income Total comprehensive income Example Ltd Notes to the financial statements For the year ended 31 December 20X3 (extracts) 4. Discontinued operation: analysis of profit The profit from discontinued operations is analysed as follows: Revenue Expenses Profit before tax Tax Gains/ (losses) after tax Gain/ (loss on re-measurement to fair value less costs to sell Gain/ (loss) on disposal of assets in the/ the discontinued operations Tax on gains/ (losses) Profit for the period 20X3 C000 150 (100) 50 (60) 40 30 20 (10) 30 20X2 C000 790 (500) 290 (97) 7 10 0 (3) 200 20X3 C000 800 (300) 500 (150) 350 30 380 0 380 20X2 C000 800 (400) 400 (180) 220 200 420 0 420

4&5

8.2

In the statement of cash flows

In respect of discontinued operations, an entity shall disclose the following either on the face of the statement of cash flows or in the notes thereto for all periods presented [para 33(c)]: net cash flows from operating activities; net cash flows from investing activities; and net cash flows from financing activities.
Example Ltd Notes to the statement of cash flows For the year ended 31 December 20X3 (extracts) 20X3 4. Discontinued operation C000 Included in the statement of cash flows are the following net cash flows resulting from a discontinued operation: Net cash flows from operating activities (assumed figures) 5 Net cash flows from investing activities (assumed figures) 0 Net cash flows from financing activities (assumed figures) (8) Net cash outflows (assumed figures) (3) 20X2 C000

6 1 (4) 3

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8.3

Other note disclosure

8.3.1 Components no longer held for sale (IFRS 5.37) Where the component is no longer held for sale, the amounts previously disclosed as discontinued operations in the prior periods must be reclassified and included in continuing operations. This will facilitate better comparability. See the examples of disclosure provided in 8.1 and assume that the discontinued operation was first classified as such in 20X2, but that during 20X3 the criteria for classification as discontinued were no longer met. Notice that the 20X2 figures shown below, whereas previously split into continuing, discontinuing and total (in 8.1) are now restated in one column. Although IFRS 5 does not require it, it is suggested that a note be included explaining to the user that a previously classified discontinued operation has been reabsorbed into the figures representing the continuing operations of the entity, thus explaining the re-presentation of the 20X2 figures.
Example Ltd Statement of comprehensive income For the year ended 31 December 20X3 (extracts) 20X3 C000 Revenue Expenses Profit before tax Tax expense Profit for the period Other comprehensive income Total comprehensive income 1 000 (400) 600 (220) 380 0 380 20X2 C000 Restated 1 600 (900) 700 (280) 420 0 420

The above amounts are assumed amounts: notice how they tie up with the previous explanatory examples in Option A and Option B.

8.3.2 Criteria met after the end of the reporting period (IAS 5.12) If the criteria for separate classification and measurement as held for sale are met during the post-reporting date period, no adjustments should be made to the amounts and no reclassification of the assets as held for sale should take place. This is treated as a nonadjusting event with the following disclosure being necessary: a description of the non-current asset (or disposal group); a description of the facts and circumstances leading to the expected disposal; the expected manner and timing of the disposal; and the segment (if applicable) in which the non-current asset (or disposal group) is presented. The note disclosure of an event after the reporting period might look like this:
Example Ltd Notes to the financial statements For the year ended 31 December 20X3 (extracts) 4. Events after the reporting period On 15 February 20X4, the board of directors decided to dispose of the shoe division following severe losses incurred by it during the past 2 years. The division is expected to continue operations until 30 April 20X4, after which its assets will be sold on a piecemeal basis. The entire disposal of the division is expected to be completed by 31 August 20X4. 328 Chapter 9

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9. Summary

IFRS 5

Non-current assets held for sale

Discontinued operations

Non-current assets held for sale Identification

General Normal 6 criteria

If asset not expected to be sold within 1 yr 3 scenarios and related criteria

Assets acquired with intention to sell 2 criteria

Measurement

Cost model Initially: at cost Subsequently:

Revaluation model Initially: at cost Subsequently:

Assets acquired with intention to sell Initially: Lower of CA (cost) and FV costs to sell

Before reclassification:
Depreciate and impair

Before reclassification:
Depreciate; revalue and impair

When reclassifying:
Remeasure on cost model

When reclassifying:

Remeasure on revaluation model Adjust to lower of CA or FV CtS Stop depreciating Transfer to NCAHforS Remeasure to latest FV CtS (reversals of IL limited to accumulated ILs)

Adjust to lower of CA or FV CtS Stop depreciating Transfer to NCAHforS Remeasure to latest FV CtS (reversals of IL limited to accumulated ILs)

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Non-current assets held for sale No longer held for sale

Transfer back to PPE

Remeasure to lower of: CA (had asset never been classified as NCAHforS); and RA Resume depreciation

Discontinued operations

Identification A component that has been disposed of or is classified as held for sale and is: Separate major line or area Part of a single disposal plan or Is a subsidiary acquired to sell

Measurement Same as for noncurrent assets held for sale

Disclosure Statement of comprehensive income: Total profit or loss from discontinued operations Notes or on the face:; Analysis of total profit Gain or loss on remeasurement Gain or loss on disposal of assets Tax effects of above Changes in estimates Statement of cash flows: (face or notes) Operating activities Investing activities Financing activities Other notes: Components no longer held for sale Criteria met after the end of the reporting period

Face:

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