Non Current Assets Held For Sale: Recognition
Recognition Criteria Under IFRS 5
IFRS 5 provides that the asset under consideration must be available for immediate sale in its present condition subject to terms that are usual and customary for sales of such assets and its sale must be highly probable.
Immediate sale
Example:
AV Ltd owns a building where it runs its branch sales office. Due to change in business operations, the building is not required by AV Ltd. The building is agreed to be sold in its present condition to the buyer. However, some of the furniture is still lying in the building. Also, staffs needs to be transferred to other location. These activities would take around 2 weeks’ time.
Considering the above example, we notice that the building is considered as an asset held for sale. 2 weeks’ time in above case is usual and customary before the actual transfer of building happens. Hence, the asset is shown as a non-current asset held for sale.
Example:
AV Ltd owns a building where it runs its branch sales office. Due to change in business operations, the building is not required by AV Ltd. The building is agreed to be sold in its present condition to the buyer. However, AV Ltd seeks some time to identify a new building where it can transfer the staff and shift the belongings. In this situation, the first building is not held for sale, since it is not available for immediate sale. It would only happen once the replacement building is present. Although, disclosures with regard to the agreement entered into with buyer should be given.
Example:
AV Ltd intends to sell its manufacturing unit. However, there are a few orders accepted by AV Ltd which need to be completed, before the unit can be sold. In this case, the unit is not considered as available for immediate sale.
Example:
AV Ltd would like to sell the property it owns. However, to ensure more revenue by sales, it conducts renovation and repairs. The property, in this case, is not considered as available for immediate sale, until these repairs are complete.
Meaning of Highly Probable:
An appropriate level of management must be committed to sell the asset or disposal group;
The asset is being actively marketed;
An active program to locate a buyer and complete plan must have been initiated;
The sale should be expected to qualify for recognition as a completed sale within 1 year;
It is unlikely that any significant changes to the plan will be made or that the plan will be withdrawn.
A sale is not considered as highly probable if the management is not committed to a selling plan.
Condition 1
The matter has been placed at the Board (decision-makers) and there is a consent / approval to sell the asset under consideration.
Condition 2
Active marketing for selling the asset has initiated already. This would mean that the outside parties are aware of the intention of the company that an asset or a unit is available for sale. Appointment of a selling agent or advertisement to sell the asset would be a common basis to meet the condition.
Example:
AV Ltd owns a building in Mumbai. Considering a surplus to its requirements, AV Ltd decides to sell the building. An advertisement has been placed in all leading newspapers to sell the building on ‘as is’ basis. In this case, the sale of building is presumed to be meeting the definition of highly probable.
Condition 3
Marketing for sale of asset is done close to the fair value of the asset. A higher price may be quoted, where the expectations are that negotiations to conclude the price at fair value will be there.
Condition 4
It is reasonably certain that the sale would be completed in 1 years’ time from the date of classification to hold for sale. Market conditions, past experience etc. are a factor in determining to identify if the sale is considered as recognised to be completed in one year’s time.
Condition 5
No circumstances indicate that the sale plan is likely to be withdrawn, or the intentions are likely to change.
Example:
AV Ltd’s management approves plan for sale of a plant. All efforts are put in place to identify the buyer, marketing is done, etc. However, a sudden increase in bank interest rates is keeping buyers away to put their money into purchases of such assets. The buyers are difficult to find. Global factors like inflation, lower demand for industrial output and local factors like trade unions issues restricting sale of units have resulted in management reconsidering the decision to sell the plant.
In the above case, the plant cannot be considered to be held for sale purposes.