When any disposal occurs or is planned, consideration should be given to IFRS 5, ‘Non-current assets held for sale and discontinued operations’. This standard applies to non-current assets (or disposal groups) whose value will be recovered principally through sale rather than through continuing use. It does not apply to assets that are being scrapped, wound down or abandoned. A disposal group is 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.
Where the non-current asset (or disposal group) is available for its immediate sale in its present condition and its sale is highly probable, it should be classified as ‘held for sale’. A sale is ‘highly probable’ where: there is evidence of management commitment; there is an active programme to locate a buyer and complete the plan; the asset is actively marketed for sale at a reasonable price; and the sale will normally be completed within 12 months from the date of classification.
Assets (or disposal groups) classified as held for sale are:
- Carried at the lower of the carrying amount and fair value less costs to sell.
- Not depreciated or amortized.
- Presented separately on the face of the balance sheet.
A discontinued operation is a component of an entity that represents a separate major line of business or geographical area that can be distinguished operationally and financially and that the entity has disposed of or classified as ‘held for sale’. It could also be a subsidiary acquired exclusively for resale.
An operation is classified as discontinued at the date on which the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation. Where the criteria for that classification are not met until after the balance sheet date, there is no retrospective classification.
Discontinued operations are presented separately in the income statement and the cash flow statement. There are additional disclosure requirements in relation to discontinued operations.
The date of disposal of a subsidiary is the date on which control passes. The consolidated income statement includes the results of a subsidiary up to the date of disposal and the gain or loss on disposal is the difference between (a) the carrying amount of the net assets plus any attributable goodwill and exchange/available for sale amounts held in equity, and (b) the proceeds of sale.
You may want to read the other chapters as well:
IFRS-1: First Time Adoption of IFRS
IFRS-2: Share-based Payment
IFRS-3: Business Combination
IFRS-4: Insurance Contract
IFRS-5: Disposal of Subsidiaries, Business and Non-current Asset
IFRS-6: Extractive Industries
IFRS-7, IAS 32 & 39: Financial Instruments
IFRS-8: Segment Reporting