IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations

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IFRS 5 Non-current Assets Held for Sale

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations says that a discontinued operation is a component of an entity that has been sold, or which is classified as held for sale, and which is:

• a separate line of business (either in terms of operations or location)
• part of a plan to dispose of a separate line of business, or
• a subsidiary acquired solely for the purpose of resale.

An operation is held for sale if its carrying amount will not be recovered principally by continuing use. To be classified as held for sale (and therefore to be a discontinued operation) at the reporting date, it must meet the following criteria.

• The operation is available for sale immediately in its current condition.
• The sale is highly probable and is expected to be completed within one year.
• Management is committed to the sale.
• The operation is being actively marketed.
• The operation is being offered for sale at a reasonable price in relation to its current fair value.
• It is unlikely that the plan will change or be withdrawn.

Presentation

Users of the financial statements are more interested in future profits than past profits. They are able to make a better assessment of future profits if they are informed about operations that have been discontinued during the period. IFRS 5 requires information about discontinued operations to be presented in the financial statements.

• A single amount should be presented on the face of the statement of profit or loss and other comprehensive income that is comprised of:
  – the total of the post-tax profit or loss of discontinued operations
  – the post-tax gain or loss on the measurement of fair value less costs to sell or on the disposal of the discontinued operation.
• An analysis of the single amount described above should be provided. This can be presented on the face of the statement of profit or loss and other comprehensive income or in the notes to the financial statements.
• If a decision to sell an operation is taken after the year-end but before the accounts are approved, this is treated as a non-adjusting event after the reporting date and disclosed in the notes. The operation does not qualify as a discontinued operation at the reporting date and separate presentation is not appropriate.
• In the comparative figures, the operations are also shown as discontinued (even though they were not classified as such at the end of the previous year).

Example

The Portugal group of companies has a financial year-end of 30 June 20X4. The financial statements were authorized three months later. The group is disposing of many of its subsidiaries, each of which is a separate major line of business or geographical area.

1. A subsidiary, England, was sold on 1 January 20X4.
2. On 1 January 20X4, an announcement was made that there were advanced negotiations to sell subsidiary Switzerland and that, subject to regulatory approval, this was expected to be completed by 31 October 20X4.
3. The board has also decided to sell a subsidiary called France. Agents have been appointed to find a suitable buyer but none have yet emerged. The agent’s advice is that potential buyers are deterred by the expected price that Portugal hopes to achieve.
4. On 10 July 20X4, an announcement was made that another subsidiary, Croatia, was for sale. It was sold on 10 September 20X4.

Required:

Explain whether each of these subsidiaries meets the definition of a ‘discontinued operation’ as defined by IFRS 5.

Solution

England has been sold during the year. It is a discontinued operation per IFRS 5.

Switzerland is a discontinued operation per IFRS 5. There is clear intention to sell, and the sale is highly probable within 12 months. France is not a discontinued operation per IFRS 5.

It does not seem that France is being offered for sale at a reasonable price in relation to its current fair value. The sale does not seem to be highly probable within 12
months. Croatia is not a discontinued operation per IFRS 5. The conditions for
classification, as held for sale, were not met until after the year end.