IFRS 5: Non-current Assets Held for Sale & Discontinued Operations Explained

IFRS 5 explains how to account for non-current assets held for sale and discontinued operations. It sets out the criteria for classification and provides guidance on how these assets and operations should be measured and presented in financial statements. In this article, we simplify IFRS 5 with examples and clear explanation.

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

This article provides a comprehensive overview of IFRS 5, focusing on its application and implications for ACCA students and professionals. It covers the standard’s scope, classification criteria, measurement rules, presentation requirements, and practical examples, tailored to the needs of those preparing for ACCA exams or applying IFRS in practice.

Introduction

International Financial Reporting Standard 5 (IFRS 5), titled "Non-current Assets Held for Sale and Discontinued Operations," is a pivotal standard issued by the International Accounting Standards Board (IASB) in March 2004. It replaced IAS 35 "Discontinuing Operations" and has been amended several times to align with other IFRS standards. IFRS 5 specifies the accounting treatment for non-current assets held for sale and sets out requirements for presenting and disclosing discontinued operations, ensuring financial statements provide clear and relevant information.

The standard’s primary objective is to enhance transparency by distinguishing assets and operations that an entity intends to dispose of from those it will continue to use. This distinction aids stakeholders, such as investors and creditors, in assessing the entity’s future cash flows and financial performance. For ACCA students, particularly those studying for the Financial Reporting (FR) or Diploma in International Financial Reporting (DipIFR) exams, understanding IFRS 5 is crucial due to its frequent appearance in exam scenarios.

Scope of IFRS 5

IFRS 5 applies to all recognized non-current assets and disposal groups, which are groups of assets and liabilities to be disposed of together in a single transaction. However, certain assets are excluded from its measurement provisions, though they may still be subject to its presentation and disclosure requirements if part of a disposal group classified as held for sale. The exclusions include:

• Deferred tax assets (IAS 12)
• Assets arising from employee benefits (IAS 19)
• Financial assets within the scope of IFRS 9
• Investment properties measured at fair value (IAS 40)
• Agricultural assets measured at fair value less costs to sell (IAS 41)
• Insurance contracts (IFRS 17)

Understanding these exclusions is essential for ACCA candidates, as exam questions may test the ability to identify which assets fall under IFRS 5’s scope.

Classification of Non-current Assets as Held for Sale

A non-current asset or disposal group is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. The following criteria must be met:

1. Management Commitment: There must be a committed plan to sell the asset or disposal group.
2. Availability for Immediate Sale: The asset must be available for immediate sale in its present condition, subject only to usual and customary terms.
3. Active Program to Locate a Buyer: An active program to find a buyer and complete the sale must be initiated.
4. Highly Probable Sale: The sale must be highly probable, expected to be completed within one year from the date of classification, unless extended due to events beyond the entity’s control.
5. Reasonable Price: The asset must be marketed at a price reasonable in relation to its current fair value.
6. Unlikely to Withdraw: The plan to sell should indicate that significant changes or withdrawal are unlikely.

If these criteria are met after the reporting period but before the financial statements are authorized, the asset cannot be classified as held for sale in those statements but requires disclosure. For example, a company planning to sell a factory must have a board-approved plan, actively market the factory, and expect to complete the sale within a year to classify it as held for sale.

Measurement of Assets Held for Sale

Assets or disposal groups classified as held for sale are measured at the lower of their carrying amount or fair value less costs to sell. Fair value is the price that would be received in an orderly transaction between market participants, while costs to sell include incremental costs directly attributable to the disposal, such as legal fees or transaction costs.

Key measurement rules include:

• No Depreciation: Depreciation or amortization ceases once an asset is classified as held for sale.
• Impairment Losses: If fair value less costs to sell is lower than the carrying amount, an impairment loss is recognized in profit or loss.
• Subsequent Increases: Gains from subsequent increases in fair value less costs to sell can be recognized, but not beyond the cumulative impairment loss previously recognized under IFRS 5 or IAS 36.

For disposal groups, any impairment loss is first allocated to reduce goodwill, then to other assets on a pro-rata basis, excluding assets outside IFRS 5’s measurement scope. For example, if a disposal group’s fair value less costs to sell is $800,000 but its carrying amount is $1,000,000, a $200,000 impairment loss is recognized, allocated appropriately.

Presentation and Disclosure for Assets Held for Sale

In the statement of financial position, non-current assets and disposal groups classified as held for sale are presented separately from other assets, typically as current assets. Liabilities of a disposal group are also presented separately as current liabilities, without offsetting against assets. Disclosure requirements include:

• A description of the asset or disposal group
• Facts and circumstances of the sale or expected sale
• Expected manner and timing of disposal
• Gain or loss recognized, if not separately presented
• The reportable segment (per IFRS 8), if applicable

These disclosures ensure stakeholders understand the impact of the disposal on the entity’s financial position.

Discontinued Operations

A discontinued operation is a component of an entity that has been disposed of or is classified as held for sale and meets one of these criteria:

• Represents a separate major line of business or geographical area of operations
• Is part of a single coordinated plan to dispose of such a line or area
• Is a subsidiary acquired exclusively for resale

A component is a part of an entity with operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes. In the statement of comprehensive income, the post-tax profit or loss of discontinued operations and any gain or loss on their measurement or disposal are presented as a single amount, separate from continuing operations. Detailed analysis, including revenue, expenses, pre-tax profit or loss, and related tax, is provided in the notes.

For example, if a company sells a division representing a major geographical area, the results of that division are reported as discontinued operations, with a single line item in the statement of comprehensive income and detailed disclosures in the notes.

Practical Examples and Case Studies

Example 1: Asset Held for Sale

Suppose a company owns a building with a carrying amount of $1,000,000. It decides to sell the building, meeting all IFRS 5 criteria. The fair value is $900,000, with costs to sell of $50,000, resulting in a fair value less costs to sell of $850,000. An impairment loss of $150,000 is recognized, and the building is reclassified as a current asset held for sale at $850,000. If the fair value later increases to $950,000 (fair value less costs to sell: $900,000), a gain of $50,000 is recognized, adjusting the carrying amount to $900,000, as it does not exceed the cumulative impairment loss.

Example 2: Discontinued Operation (Tùzǐ Group)

Consider Tùzǐ Group, which disposed of its subsidiary Niú Co on 1 July 20X3, qualifying as a discontinued operation. The financial details are as follows:

Description	Amount ($)
Profit for 6 months to 1 July (6/12 × $57,200,000)	28,600,000
Proceeds from disposal	300,000,000
Non-controlling interest	54,480,000
Net assets disposed	(204,400,000)
Goodwill disposed	(84,000,000)
Profit on disposal	66,080,000
Total profit from discontinued operations	94,680,000

The consolidated statement of profit or loss includes:

Description	Amount ($)
Revenue	681,100,000
Cost of sales	(338,600,000)
Gross profit	342,500,000
Operating expenses	(150,900,000)
Operating profit	191,600,000
Interest expense	(1,000,000)
Profit before tax	190,600,000
Tax	(30,200,000)
Profit from continuing operations	160,400,000
Profit from discontinued operations	94,680,000
Total profit	255,080,000
Attributable to owners (Continuing)	160,400,000
Attributable to owners (Discontinued)	88,960,000
Attributable to non-controlling interests (Discontinued)	5,720,000

This example illustrates how to calculate and present discontinued operations, a common requirement in ACCA exams.

ACCA Exam Tips

IFRS 5 is a frequent topic in ACCA exams, particularly in the Financial Reporting (FR) and DipIFR papers. Common question types include:

• Determining whether an asset or disposal group meets the held-for-sale criteria
• Calculating impairment losses or gains for assets held for sale
• Preparing extracts of financial statements, including separate presentation of discontinued operations
• Applying disclosure requirements for assets held for sale or discontinued operations

Common mistakes to avoid:

• Incorrectly classifying assets as held for sale when criteria are not met
• Continuing depreciation after classification as held for sale
• Misapplying measurement rules, such as incorrect calculation of fair value less costs to sell
• Failing to present discontinued operations separately or omitting required disclosures

📘 Also Read: IAS 38 – Intangible Assets Accounting under IFRS

Conclusion

IFRS 5 plays a critical role in financial reporting by ensuring that assets held for sale and discontinued operations are accounted for and presented in a way that enhances transparency and comparability. For ACCA students and professionals, mastering IFRS 5 is essential for both exam success and practical application in financial reporting. By understanding its scope, classification criteria, measurement rules, and presentation requirements, and by practicing with real-world examples, candidates can confidently tackle IFRS 5-related questions and contribute to high-quality financial reporting.