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

 

Simplified Tutorial on IFRS 5 (with Case Study and Practice Questions)

Overview

IFRS 5 sets the rules for classifying, measuring, and presenting non-current assets or disposal groups that are held for sale. It also provides guidelines for the presentation of discontinued operations in financial statements.

The primary goal of IFRS 5 is to ensure that non-current assets and discontinued operations are presented in a way that reflects their imminent disposal and provides clear, relevant information to financial statement users.

Key Concepts

1. Non-Current Assets Held for Sale:

   • A non-current asset is classified as "held for sale" if its carrying amount will be recovered primarily through a sale transaction rather than continued use.
   • The asset must be available for immediate sale in its current condition and the sale must be highly probable (expected within 12 months).

2. Disposal Groups:

   • A disposal group includes assets and liabilities that will be disposed of together as a group.
   • For example, the sale of a division of a company.

3. Discontinued Operations:

   • A discontinued operation is a component of an entity that has been sold or classified as held for sale and represents:
     • A separate major line of business or geographical area, or
     • Part of a single coordinated plan to dispose of a major line of business or geographical area.
   • Results of discontinued operations are presented separately in the statement of profit or loss.

4. Measurement:

   • Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
   • Depreciation on these assets stops once they are classified as held for sale.

5. Presentation:

   • Assets held for sale are presented separately from other assets in the statement of financial position.
   • Liabilities directly associated with these assets are also presented separately.

Steps for Classifying Assets Held for Sale

1. Determine if the sale is highly probable:

   • Management must commit to a plan to sell.
   • Active efforts to locate a buyer must be underway.
   • The sale must be expected within a year.

2. Assess measurement:

   • Compare the carrying amount with fair value less costs to sell.
   • Recognize any impairment loss in profit or loss.

3. Stop depreciation:

   • Once classified, the asset is no longer depreciated.

4. Update presentation:

   • Show the asset (and related liabilities) separately in the financial statements.

Case Study: Hello Bae

Scenario: Hello Bae operates three divisions: electronics, clothing, and furniture. The company decides to sell its furniture division to focus on its core businesses. The division meets the criteria for classification as "held for sale."

Steps Taken:

1. Classification:

   • The furniture division is a separate major line of business and qualifies as a discontinued operation.
   • Assets and liabilities related to the division are classified as "held for sale."

2. Measurement:

   • The carrying amount of the furniture division’s assets is $1,000,000.
   • The fair value is estimated at $950,000, with selling costs of $50,000.
   • Fair value less costs to sell is $900,000.
   • Impairment loss of $100,000 ($1,000,000 - $900,000) is recognized.

3. Presentation:

   • The assets and liabilities of the furniture division are shown separately in the statement of financial position.
   • The results of the furniture division are shown as discontinued operations in the statement of profit or loss.

Financial Impact:

• Impairment loss reduces the current period’s profit.
• The presentation provides users with a clear understanding of the ongoing business operations and the disposal plan.

Practice Questions

1. What are the key criteria for classifying a non-current asset as "held for sale" under IFRS 5?
2. How are discontinued operations presented in the financial statements?
3. Why is depreciation stopped for assets classified as "held for sale"?

This course module on IFRS 5 helps you understand the classification, measurement, and presentation of non-current assets held for sale and discontinued operations with clarity and real-world applicability.

IFRS 5 Quiz

1. What is the primary purpose of IFRS 5?

To classify intangible assets
To present non-current assets held for sale
To regulate inventory management
To manage goodwill impairment

2. When is a sale considered highly probable under IFRS 5?

When the sale is expected within 24 months
When the asset is transferred to inventory
When management commits to a plan to sell
When depreciation is resumed

3. What happens to depreciation for assets held for sale?

It increases by 50%
It continues as usual
It is stopped
It is included in fair value

4. How are discontinued operations presented in financial statements?

Under operating expenses
Separately in the profit or loss statement
Included in equity
As part of cost of goods sold

5. What is measured at the lower of carrying amount and fair value less costs to sell?

Depreciation
Disposal group liabilities
Non-current assets held for sale
Inventory