ACCA PAPER F7 - INTERNATIONAL

ACCOUNTING FOR NON-CURRENT ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS
IFRS 5 NCA HFS & DO
1.

INTRODUCTION

Any non-current assets or groups of non-current assets (e.g. subsidiary, CGU) which is to be sold or
abandoned should be reclassify and re-measured according to IFRS 5.
The reclassification and re-measurement will be presented and disclosed in the face of financial
statements and notes to the accounts.
This standard covers 2 sections comprises of:
i) NCA HFS
ii) DO

2.

RECOGNIZING AND DETERMINING NON-CURRENT ASSETS HELD FOR SALE

The main principal for any assets to be classified as HFS are any assets the remaining CV will be obtained
from sales transactions rather than usage (the assets need to be disposed of through sale) e.g. disposed
machinery vs machinery under usage.
Thus, the principal treatment for NCA HFS would be almost similar to the treatment of inventory.
According to IFRS 5, for a non-current assets to be classified as held for sale, the following conditions must
be met for the particular assets (or disposal group):
i) The asset under consideration is available for immediate sale.
ii) Management is committed to a plan to sell.
iii) An active programme to locate a buyer is initiated.
iv) The sale is highly probable, able to sell within 12 months of classification as held for sale (subject
to limited exceptions).
v) The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value.
vi) Actions required to complete the plan indicate that it is unlikely that plan will be significantly
changed or withdrawn.
Therefore, operations that are expected to be wound down or abandoned would not meet the definition
(but may be classified as discontinued once abandoned).
The asset under classification can continue to be classified as NCA HFS regardless of the ability to sell
within one accounting year, provided all the necessary condition are still satisfied.
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.

3.

MEASUREMENT OF NCA HFS

Non-current assets or disposal groups that are classified as held for sale are measured at the lower of
carrying amount (according to previous IAS at the date of classification) and fair value less costs to sell
(NRV) at the date of classification.
Non-current assets or disposal groups that are classified as held for sale shall not be depreciated.
Impairment must be considered both at the time of classification as held for sale and subsequently:
i) At the time of classification as held for sale. Immediately prior to classifying an asset or disposal
group as held for sale, 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.
ii) 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 (NRV) i.e. the current CV vs NRV. Any impairment loss that arises by using the measurement
principles in IFRS 5 must be recognised in profit or loss, even for assets previously carried at
revalued amounts. This is not consistent with IAS 36 impairment where IL will be recognized by
the different between CV and RA (higher between VIU or NRV).

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ACCA PAPER F7 - INTERNATIONAL

ACCOUNTING FOR NON-CURRENT ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS

Assets carried at fair value prior to initial classification (e.g. Investment property at fair value model), the
deduction of costs to sell from fair value will be charged to profit or loss at the date of classification.
A gain for any subsequent increase in fair value less costs to sell of an asset under held for sale 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 e.g. if the
cumulative impairment loss is $ 1 million, the allowable gain to be recognized is limited to $1 million.

4.

REVERSAL OF NCA HFS

Any assets or disposal group under held for sale that no longer satisfied the held for sale condition should
be reclassified as previous IAS and measured at lower of:
i) Previous CV before reclassification any abandoned depreciation ; or
ii) RA at the date of reversal.

5.

PRESENTATION OF NCA HFS

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 statement of financial position.
Normally under current assets and liabilities.
No offsetting between assets and liabilities under held for sales.

6.

RECOGNIZING AND DETERMINING DISCONTINUED OPERATION

A discontinued operation is a component of an entity that either has been disposed of or is classified as
held for sale, and:
a. represents either a separate major line of business or a geographical area of operations, and
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 a view to resale and the disposal involves loss of control.

7.

PRESENTATION OF DISCONTINUED OPERATION

Statement of financial position

a. Assets and liabilities of the discontinued operation should be recognized separately from other
assets and liabilities.
b. No offsetting is allowed for the asset and liabilities under discontinued operations.
Income statement presentation
a. 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 statement of comprehensive income.
b. If the entity presents profit or loss in a separate income statement, a section identified as relating
to discontinued operations is presented in that separate statement.
c. Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is
required either in the notes or in the statement of comprehensive income in a section distinct
from continuing operations.
d. Such detailed disclosures must cover both the current and all prior periods presented in the
financial statements.
Cash flow statement presentation
a. 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.
No retrospective classification for discontinued operation, since the discontinued criteria are met after the
balance sheet date.

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ACCA PAPER F7 - INTERNATIONAL

ACCOUNTING FOR NON-CURRENT ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS
8.

PROFORMA PRESENTATION FOR DISCONTINUED OPERATION

$m

Continuing operations
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Finance costs paid
Share of profit of associate
Profit before tax
income tax expense
Profit for the year from continuing operations

XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX

Discontinued operations
Profit for the year from discontinued operations
Profit for the year

XXX
XXX

Other comprehensive income after tax (Continuing operations):

Gain on investment in equity instruments
Losses on property revaluation
Re-measurement losses on defined benefit plan
Other comprehensive income for the year from continuing operations
Other comprehensive income for the year from discontinued operations
Total comprehensive income for the year

XXX
XXX
XXX
XXX
XXX
XXX

LECTURE EXAMPLE 1 DETERMINING NON-CURRENT ASSET HELD FOR SALE

Hyundei is preparing its financial statements for the year ended 31 December 2008.
(a) On 1 December 2008, the entity became committed to a plan to sell a surplus office property and has
already found a potential buyer. On 15 December 2008 a survey was carried out and it was discovered
that the building had dry rot and substantial remedial work would be necessary. The buyer is
prepared to wait for the work to be carried out, but the property will not be sold until the problem
has been rectified. This is not expected to occur until april 2009.
(b) A subsidiary entity, Builder, is for sale at a price of $3 milllion. There has been some interest by
prospective buyers but no sale as of yet. One buyer has made an offer of $2 million but the directors
of Hyundei rejected the offer as they were hoping to achieve a price of $3 million. The directors have
just received advice from their accountants that the fair value of the business is $2.5 million. They
have decided not to reduce the sale price of Builder at the moment.
Required
Discuss on how should the above transactions be treated in Hyundei financial statements for the year 31
December 2008.
Step by step solutions
Solution (a)
Step 1 Determine if the assets meet all the criteria of IFRS 5
Criteria
1.
2.
3.

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The item is available for immediate sale in its present condition

The sale is highly probable
The management is committed to a plan to sell the item

YYES () /
NO (X)
x

ACCA PAPER F7 - INTERNATIONAL

ACCOUNTING FOR NON-CURRENT ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS
4.
5.
6.
7.

An active programme to locate a buyer has been initiated

The item is being actively marketed at a reasonable price in relation to its current fair
value
The sale is expected to be completed within one year form the date of classification
It is unlikely that the plan will change significantly or be withdrawn

Step 2 Have your verdict or conclusion based on the outcome above

Verdict : Cant be classified as IFRS 5 as not in a condition for immediate sale.
Solution (b)
Step 1 Determine if the assets meet all the criteria of IFRS 5
Criteria
1.
2.
3.
4.
5.
6.
7.

YES () /
NO (X)

The item is available for immediate sale in its present condition

The sale is highly probable
The management is committed to a plan to sell the item
An active programme to locate a buyer has been initiated
The item is being actively marketed at a reasonable price in relation to its current fair
value
The sale is expected to be completed within one year form the date of classification
It is unlikely that the plan will change significantly or be withdrawn

x
x
x

Step 2 Have your verdict or conclusion based on the outcome above

Verdict : Cant be classified as IFRS 5 as the quoted price was not at fair value i.e reasonable price. The
intention might be to manipulated his financial statement.
LECTURE EXAMPLE 2 MEASUREMENT FOR NCA HFS
On 1 January 20x1, More Co bought a chicken-processing machine for $20,000. It has an expected useful life of
10 years and a nil residual value. On 31 December 20x2, after 2 years of using the asset, More Co decides to
sell the machine and starts actions to locate a buyer. The machines are in short supply, so More Co is confident
that the machine will be sold fairly quickly. Its current market value is $15,000 and it will cost $500 to
dismantle the machine and make it available to the purchaser.
Required
At what value should the machine be stated in More Cos statement of financial position at 31 December 20x2.
Step by step solutions
Step 1 Determine the NCA HFS status
Criteria
1.
2.
3.
4.
5.
6.
7.

The item is available for immediate sale in its present condition

The sale is highly probable
The management is committed to a plan to sell the item
An active programme to locate a buyer has been initiated
The item is being actively marketed at a reasonable price in relation to its current fair value
The sale is expected to be completed within one year form the date of classification
It is unlikely that the plan will change significantly or be withdrawn

Verdict : Can be classified as IFRS 5 as it fullfill all condition for immediate sale

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YES () /
NO (X)

ACCA PAPER F7 - INTERNATIONAL

ACCOUNTING FOR NON-CURRENT ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS
Step 2 Compute the carrying amount (CV)

Cost
Acc. depreciation
CV

Workings
Per Q
[(20k / 10yrs)x 2yrs]

$
20,000
(4,000)
16,000

Workings
Per Q
Per Q

$
15,000
(500)
14,500

Step 3 Compute the NRV

Fair value
Cost to sell
CV

Step 4 Determine the qualified CV according to NCA HFS

$
CV
=
14,500
NB: NCA HFS should be measured at lower between CV or NRV at the date of transition, and the difference at
reclasification should be charged to I/S. The reclassified asset should not be depreciated afterward.
Step 5 Prepare the extract of financial statements for the year ended 31 Dec 20x2
The Statement of Comprehensive Income (I/S) extract
$
Impairment (16k 14.5k)

1,500

The Statement of Financial Position extract

$
Current assets
NCA HFS

14,500

LECTURE EXAMPLE 3 MEASUREMENT AND PRESENTATION FOR DO

Sunbuck produced cards and sold roses. However, half way through the year ended 31 March 20x6, the rose
business was closed and the assets sold off, incurring losses on the disposal of non-current assets of $76,000
and redundancy costs of $37,000. The directors reorganised the continuing business at a cost of $98,000.
Trading results may be summarised as follows:
Cards
$000
650
320
120
60

Turnover
COS
Administration cost
Distribution cost

Roses
$000
320
150
110
90

Other trading information (to be allocated to continuing operations) is as follows:

Totals
$000
Interest payable
17
Tax
31

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ACCA PAPER F7 - INTERNATIONAL

ACCOUNTING FOR NON-CURRENT ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS
Required
Prepare the income statement extract for the year ended 31 March 20x6.
Step by step solutions
Step 1 Compute the results from DO i.e. Roses
Disclosure notes for the computation of Roses
$000
320
(150)
170
(110)
(90)
(30)
(76)
(37)
(143)

Revenue
Cost of sales
Gross profit
Admin. costs
Distribution costs
Operating loss
Loss on disposal
Redundancy costs
Loss from DO

Step 2 Prepare the income statement for the year ended 31 March 20x6
INCOME STATEMENT - EXTRACT
$000
Continuing operations:
Revenue
Cost of sales
Gross profit
Admin. costs
Distribution costs
Operating profit
Reorganisation costs
Finance costs
PBT
Income taxes
Profit from continuing operations
Loss from DO (Step 1)
Loss for the year

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650
(320)
330
(120)
(60)
150
(98)
(17)
35
(31)
4
(143)
(139)