Introduction to IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations

Reasons for issuing the IFRS

1 International Financial Reporting Standard 5 Non-current Assets Held for Sale and Discontinued Operations (IFRS 5) sets out requirements for the classification, measurement and presentation of non-current assets held for sale and replaces IAS 35 Discontinuing Operations.

2 Achieving convergence of accounting standards around the world is one of the prime objectives of the International Accounting Standards Board. In pursuit of that objective, one of the strategies adopted by the Board has been to enter into a memorandum of understanding with the Financial Accounting Standards Board (FASB) in the United States that sets out the two boards’ commitment to convergence. As a result of that understanding the boards have undertaken a joint short-term project with the objective of reducing differences between IFRSs and US GAAP that are capable of resolution in a relatively short time and can be addressed outside major projects.

3 One aspect of that project involves the two boards considering each other’s recent standards with a view to adopting high quality accounting solutions. The IFRS arises from the IASB’s consideration of FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), issued in 2001.

4 SFAS 144 addresses three areas: (i) the impairment of long-lived assets to be held and used, (ii) the classification, measurement and presentation of assets held for sale and (iii) the classification and presentation of discontinued operations. The impairment of long-lived assets to be held and used is an area in which there are extensive differences between IFRSs and US GAAP. However, those differences were not thought to be capable of resolution in a relatively short time. Convergence on the other two areas was thought to be worth pursuing within the context of the short-term project.

5 The IFRS achieves substantial convergence with the requirements of SFAS 144 relating to assets held for sale, the timing of the classification of operations as discontinued and the presentation of such operations.

Main features of the IFRS

6 This IFRS 5:

(a) adopts the classification ‘held for sale’.

(b) introduces the concept of a disposal group, being 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.

(c) specifies that assets or disposal groups that are classified as held for sale are carried at the lower of carrying amount and fair value less costs to sell.

(d) specifies that an asset classified as held for sale, or included within a disposal group that is classified as held for sale, is not depreciated.

(e) specifies that an asset classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale, are presented separately in the statement of financial position.
(f) withdraws IAS 35 Discontinuing Operations and replaces it with requirements that:

(i) change the timing of the classification of an operation as discontinued. IAS 35 classified an operation as discontinuing at the earlier of (a) the entity entering into a binding sale agreement and (b) the board of directors approving and announcing a formal disposal plan. The IFRS classifies an operation as discontinued at the date the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation.

(ii) specify that the results of discontinued operations are to be shown separately in the statement of comprehensive income.

(iii) prohibit retroactive classification of an operation as discontinued, when the criteria for that classification are not met until after the reporting period.