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SUNDRY POINTS
Exchanges of noncurrent assets between companies can be treated as held for sale when such an exchange has a commercial substance in accordance with IAS 16.
Occasionally companies acquire noncurrent assets exclusively with a view to disposal. In these cases, the noncurrent asset will be classified as held for sale at the
date of the acquisition only if it is anticipated that it will be sold within the one-year period and it is highly probable that the held-for-sale criteria will be met within a
short period of the acquisition date. This period normally will be no more than three months.
If the criteria for classifying a noncurrent asset as held for sale occur after the end of the reporting period, the noncurrent asset should not be shown as held for sale.
However, certain information should be disclosed about the noncurrent assets.
Operations that are expected to be wound down or abandoned do not meet the definition of held for sale. However, a disposal group that is to be abandoned may
meet the definition of a discontinued activity.
“Abandonment” means that the noncurrent asset (disposal group) will be used to the end of its economic life, or the noncurrent asset (disposal group) will be closed
rather than sold. The reasoning behind this is because the carrying amount of the noncurrent asset will be recovered principally through continued usage.
A noncurrent asset that has been temporarily taken out of use or service cannot be classified as being abandoned.
Facts
CASE STUDY 4
An entity is reorganizing its business activities. In one location, it is stopping the usage of certain equipment because the demand for the product produced
by that equipment has reduced significantly. The equipment is to be maintained in good working order, and it is expected that it will be brought back into
use if the demand increases. Additionally, the entity intends to close three out of five manufacturing units. The manufacturing units constitute a major
activity of the entity. All the work within the three units will end during the current year, and as of the year-end all work will have ceased.
Required
How will the piece of equipment and the closure of the manufacturing units be treated in the financial statements for the current year?
Solution
The equipment will not be treated as abandoned, as it will subsequently be brought back into usage. The manufacturing units will be treated as
discontinued operations.
MEASUREMENT OF NONCURRENT ASSETS THAT ARE HELD FOR SALE
Just before an asset is initially classified as held for sale, it should be measured in accordance with the applicable IFRS.
When noncurrent assets or disposal groups are classified as held for sale, they are measured at the lower of the carrying amount and fair value less costs to sell.
When the sale is expected to occur in over a year’s time, the entity should measure the cost to sell at its present value. Any increase in the present value of the cost to
sell that arises should be shown in profit and loss as a finance cost.
Any impairment loss is recognized in profit or loss on any initial or subsequent write-down of the asset or disposal group to fair value less cost to sell.
Any subsequent increases in fair value less cost to sell of an asset can be recognized in profit or loss to the extent that it is not in excess of the cumulative impairment
loss that has been recognized in accordance with IFRS 5 or previously in accordance with IAS 36.
Any impairment loss recognized for a disposal group should be applied in the order set out in IAS 36.
Noncurrent assets or disposal groups classified as held for sale should not be depreciated.
Any interest or expenses of a disposal group should continue to be provided for.
The IASB issued IFRIC 17 in 2008. This interpretation clarified that an entity shall measure a noncurrent asset (or disposal group) classified as held for distribution
to owners at the lower of its carrying amount and fair value less costs to distribute. This amendment to IFRS 5 is to be applied prospectively in annual periods
beginning on or after July 1, 2009.
CHANGE OF PLANS
If criteria for an asset to be classified as held for sale are no longer met, then the asset or disposal group ceases to be held for sale.