INTRODUCTION
Non-current assets are usually held for use in the production
of income in a business. The accounting treatment for these assets is to spread
the cost of the non-current assets over their useful lives through annual
depreciation. However, at a point, management may make a decision to sell the
assets instead of using them in the business. In this case, the assets will no
longer to be depreciated because they are no longer in use in the business.
They are rather classified us held for sale. As an example, a company may purchase
a vehicle with a useful life of five (5) years. However, in the third year, management
may decide to dispose/sell the vehicle. At this point, the vehicle will no
longer be depreciated but it will be classified as held for sale.
IFRS 5 states that an asset should be classified as
held for sale if its carrying amount will be recovered principally through a
sale transaction rather than continuing use. The asset in question should be available
for immediate sale in its present condition and the sale must be highly probable.
The sale is highly probable if:
a.
Management is committed to a plan to sell the asset
and an active program has been initiated to locate a buyer
b. The asset
is being actively marketed at a sale price that is reasonable in relation to
its current fair value
c. A completed
sale is expected within one year of classification
d.
It is unlikely there will be any significant changes to
the plan or the plan will be withdrawn.
If these criteria are not satisfied at the end of the
reporting period, the asset should not be classified as held for sale.
The classification also applies to disposal
groups, which are a group of assets and possibly some liabilities which an
entity intends to dispose of in a single transaction.
EXAMPLE 1
1.
Company A is committed to a plan to sell its
headquarters building and has initiated an active programme to find a buyer and
complete the plan. The building is being marketed at a reasonable price and a
completed sale is expected within 12 months. It is unlikely that this plan will
change significantly. The Company will not actually vacate the building until a
buyer is found but then the time taken to vacate the building will not exceed
what is regarded as usual and customary for such buildings.
Ans:
Strictly speaking, the building is not immediately available since it will take
time for the company to move out once a buyer is found. However, the time taken
will be “usual and customary”. Furthermore, all of the other criteria for classification
as held for sale are satisfied. Therefore the building should be classified as
held for sale.
2.
Company B is also committed to a plan to sell its headquarters
building and is in precisely the same situation as Company A except that it
will not vacate the building and transfer it to a buyer until a new headquarters
building has been constructed.
Ans: The
building is not available for immediate sale since the sale cannot be completed
until a new HQ building has been constructed. This building should not be
classified as held for sale.
Measurement of non-current assets held for sale
IFRS
requires that a non-current asset or disposal group which is held for sale
should be measured at the lower of its carrying amount when it was initially
classified as held for sale and its “fair value less cost to sell”
When an
asset or disposal group is initially classified as held for sale, an impairment
loss should be recognized if the fair value less costs to sell of the asset or
group at that time is lower than its carrying value. A further impairment loss
should be recognized if there is a decrease in the fair value less cost to sell
and a gain should be recognized if there is an increase in fair value less
costs to sell.
EXAMPLE 2
i.
GH¢ 9,200
ii.
GH¢9,700
iii.
GH¢10,100
In each
case, also calculate the gain or loss that should be recognized on the disposal
of the asset.
Answer.
On 1 July
2017, the asset should be recognized in the balance sheet at the lower of its carrying
amount and fair value less cost to sell. This means it will be valued at GH¢
9,500. And impairment loss of GH¢500 will be recognized.
On 31
December 2017,
i.
If the fair value less cost to sell is GH¢ 9,200, the
asset will be remeasured at GH¢9,200 and impairment loss of GH¢300 will be
recognized
ii.
If the fair value less cost to sell is GH¢ 9,700, the
asset will be remeasured at GH¢ 9,700 and a gain of GH¢200 will be recognized
iii.
If the fair value less cost to sell is GH¢ 10,100, the
asset will be remeasured to GH¢ 10,000 and a gain of GH¢500 is recognized.(the
gain cannot be GH¢600 since this would exceed the previously recognized impairment
losses in relation to the asset
The gain or
loss on the sale in May 2018 is as follows:
i.
GH¢9400 - GH¢9200 = GH¢200 gain
ii.
GH¢9400 - GH¢9,700 = GH¢300 loss
iii.
GH¢ 9400 - GH¢10,000 = GH¢ 600 loss
Measurement
of Assets no longer classified as held for sale
If an asset is classified as held for sale and
management realizes the conditions that allows it to be classified as held for
sale cannot be met, the asset should cease to be classified as held for sale.
The asset is then measured at the lower of:
·
Its carrying amount before being classified as held
for sale, less any depreciation that would have been charged in the meantime if
it had not been held for sale, and
·
Its recoverable amount at the date of the decision not
to sell.
