You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Your managing director, who is not an accountant, has recently attended a seminar and has raised a question for you concerning issues discussed at the seminar:
Another delegate was discussing the fact that the entity of which she is a director is relocating its head office staff to a more suitable site and intends to sell its existing head office building. Apparently the existing building was advertised for sale on 1 July 2015 and the entity anticipates selling it by 31 December 2015. The year end of the entity is 30 September 2015. The delegate stated that in certain circumstances buildings which are intended to be sold are treated differently from other buildings in the financial statements. Please outline under what circumstances buildings which are being sold are treated differently and also what that different treatment is. (10 marks)
There are two different ways of treating an asset which is for continued use vs those which are intended for sale.
Under IFRS, Non-current assets held for sale are to be presented separately from other assets. There are conditions for an asset to qualify as a non-current held for sale namely:
- asset is available for sale in its immediate condition; and
- sale is highly probable.
For sale to be highly probable, the following conditions are required to be met:
- management is committed to sell the asset;
- sale is expected to be completed in 1 year from the date of classification;
- asset is actively marketed for sale;
- price is reasonably approximate to fair value;
- no changes in plan to sell are expected;
If an asset is classified as held for sale:
- no depreciation is charged on the asset;
- asset is shown at the lower of carrying amount and the fair value less costs to sell. Any difference between the carrying amount and fair value less costs to sell should be charged as impairment loss.