IFRS 5 - Non-current assets held for sale and discontinued operations Véronique Weets

IFRS 5 Non-current assets held for sale and discontinued operations IFRS 5 - Non-current assets held for sale and discontinued operations Véronique Weets Instituut der Bedrijfsrevisoren November 27, 2008

IFRS 5 Non-current assets held for sale and discontinued operations FACILITATOR VÉRONIQUE WEETS Dr. Véronique Weets is a Professor of International Accounting and a faculty member at two Belgian universities. In that role she is responsible a general IFRS course and a Financial Instruments course. At regular occasions she participates in Master Programs of UAMS, Programs of Vlerick and the Solvay Business School. Véronique Weets was also associated with the IFRS Technical desk of Deloitte in Belgium, where she was involved in client work on matters such as the transition to IFRS and the subsequent application of IFRS to listed companies. She was also responsible for client trainings as well as trainings of the professional staff. As from 2006 Véronique Weets created her own company in which she helps clients with the application of IFRS on a daily basis through trainings or consultancy. This means that she actively searches for the practical translation of this principle based framework of accounting in order to provide realistic solutions to the clients. Therefore, facilitation sessions provided by Véronique Weets always have a strong theoretical basis that is translated to practical applications that are relevant to the business environments of the delegates. In addition to this, Véronique Weets is also an author of a long list of technical accounting literature in English, French and Dutch. DISCLAIMER Whilst every effort is made to ensure that the contents of its case studies and other material handed out during or in connection with courses are accurate and up-to-date, we shall not be under any liability whatsoever for any inaccuracy or misleading information whether arising for negligence or otherwise and in particular we shall not be liable for any consequential damage or expense of any loss of profit or any liability to third parties incurred as a result of reliance on such inaccurate or misleading information. REFERENCES (OTHER THAN THE OFFICIAL PUBLICATIONS OF THE IASB) Deloitte, igaap 2005 IFRS Reporting in the UK, CCH Ernst & Young, IAS 36 Impairment testing: Practical Issues, January 2007 Financial Reporting Council, Review of goodwill impairment disclosures, October 2008 KPMG, Insights into IFRS 2005/6 Edition, Thomson. Melville Allan, 2008,International financial reporting A procatical guide, FT Prentice Hall. PWC, IAS 36 Impairment Frequently asked questions, IFRS News, June 2007 supplement PWC, Manual of Accounting IFRS for the UK 2007, CCH Instituut der Bedrijfsrevisoren November 27, 2008

Instituut der Bedrijfsrevisoren November 27, 2008 IFRS 5 Non-current assets held for sale and discontinued operations

IFRS 5 Non-current assets held for sale and discontinued operations OVERVIEW Objective Scope Treatment of non-current assets (or disposal groups) as held for sale o Classification as held for sale o Measurement of non-current assets (or disposal groups) held for sale o Presentation and disclosure Discontinued operations Annual improvements 2007 Instituut der Bedrijfsrevisoren November 27, 2008

11/15/2008 IFRS 5 Non-current assets held for sale and discontinued operations Overview Objective Scope Treatment of non-current assets (or disposal groups) as held for sale Classification as held for sale Measurement of non-current assets (or disposal groups) held for sale Presentation Discontinued operations Annual improvements 2007 2 Objective Objective: Financial reporting of Assets (or disposal groups) held for sale Disposal group can be a group of cash-generating units, a cash-generating unit or part of a cash generating unit may include current assets, current liabilities and assets that are not measured in accordance with IFRS 5 (e.g. investment property) That contains a non-current asset within the scope of the measurement requirements of IFRS 5, is measured at the lower of its carrying amount and fair value less costs to sell as a whole Discontinued operations 3 1

11/15/2008 Scope Classification and presentation of all non-current assets and disposal groups held for sale Measurement of all non-current assets and disposal groups held for sale, except Deferred tax assets (IAS 12) Assets arising from eployee benefits (IAS 19) Financial assets within the scope of IAS 39 Non-current assets that are accounted for in accordance with IAS 40 or IAS 41 Contractual rights under insurance contracts (IFRS 4) 4 Classification as held for sale Classify non-current asset (disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use 5 Classification as held for sale Available for immediate sale in its present condition and Sale is highly probable Management is committed to a plan to sell Active plan to locate a buyer initiated Sale generally expected within12 months Actively marketed at a reasonable price Requirements to complete indicate plan won't alter 6 2

11/15/2008 Classification as held for sale Sale transactions include exchanges of non-current assets for other non-current assets when the exchange has commercial substance An asset (or disposal group) that is acquired exclusively with a vieuw to its subsequent disposal is classified as held for sale only if The one-year requirement is met, and It is highly probable that the other criteria will be met within a short period (3 months) 7 Classification as held for sale An extension of the period required to complete a sale does not preclude an asset (or disposal group) from being classified as held for sale if The delay is caused by events or circumstances beyond the entity s control and There is sufficient evidence that the entity remains commited to its plan to sell the asset (or disposal group) 8 Classification as held for sale Non-current assets that are to be abandonned Non-current assets that are to be closed rather than sold Not temporarily taken out of use Shall not be classified as held for sale not recovered through sales transaction Can meet the definition of a discontinued operation 9 3

11/15/2008 Measurement of assets held for sale Immediately before the classification as held for sale, the carrying amounts of the asset (and liabilities) shall be measured in accordance with applicable IFRSs Non-current assets (or disposal groups) classified as held for sale that are within the measurement scope of IFRS 5 shall be measured at the lower of their carrying amount and the fair value less costs to sell in the order of allocation as set out by IAS 36 no amortisation or depreciation while classified as held for sale Assets and liabilities that are included in a diposal group classified as held for sale that are not within the measurement scope of IFRS 5 shall be measured in accordance with applicable IFRS 10 Measurement of assets held for sale Subsequent increase in fair value less costs to sell of an asset Gain is limited to the cumulative impairment loss that has been recognised either in accordance with IFRS 5 or previously in accordance with IAS 36 of a disposal group For items outside the measurement scope of the standard Use applicable IFRS For items within the measurement scope of the standard Gain is limited to the cumulative impairment loss that has been recognised either in accordance with IFRS 5 or previously in accordance with IAS 36 11 Held for sale criteria no longer met Cease to classify asset (or disposal group) as held for sale. Then measure at the lower of carrying amount before classification as held for sale, adjusted for any depreciation, amortization or revaluations that would have otherwise been recognized; and recoverable amount at date of subsequent decision not to sell. 12 4

11/15/2008 Presentation of assets held for sale Assets held for sale: Non-current assets (or assets of disposal group) are shown separately from other assets. The liabilities of the disposal group shall be presented separately from other liabilities. Assets and liabilities shall not be offset. Major classes of assets and liabilities disclosed separately either on the face of the balance sheet or in the notes Exemption for newly acquired subsidiaries. Prior periods are not reclassified. 13 Discontinued operations A component of an entity comprises operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the rest of the entity. 14 Discontinued operations Component of an entity that -has been disposed of; or -is classified as held for sale AND Represents a separate major line of business or Is part of single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or Is a subsidiary acquired exclusively with a view to resale 15 5

11/15/2008 Discontinued operations Presentation Single amount on face of income statement comprising total of: Post-tax profit or loss of discontinued operation. Post-tax gain or loss recognized on measurement to fair value less costs to sell, or on disposal. Analysis of that amount on face or in notes into: Revenue, expenses, and pre-tax profit or loss of discontinued operations and related tax. Gain or loss recognized on measurement to fair value less costs to sell, or on disposal of the assets or disposal groups constituting the discontinued operation and the related tax. Represent disclosures for prior periods. 16 Annual improvement 2007 An entity that is committed to a sale plan involving loss of control of a subsidiary shall classify all assets and liabilities of that subsidiary as held for sale when the criteria for classification as held for sale are met, regardless whether the entity will retain a non-controlling interest in its former subsidiary after the sale If that subsidiary meets the definition of a discontinued operation Give information in accordance with IFRS 5 Effective date: 1/7/2009 17 Disclaimer Cethys BVBA takes every care in preparing course material to ensure that the content is accurate and up to date. This course material does not provide an exhaustive presentation of treatment of topics presented in accordance with IFRS. As such, when evaluating the underlying accounting treatment, the original IFRS Standards and Interpretations should be consulted, and an advice of a qualified IFRS expert should be obtained when deemed necessary. No responsibility for loss occasioned to any person acting or refraining from acting as a result of such material can be accepted by Cethys BVBA or Véronique Weets. 6

Cases IFRS 5 Non-current assets held for sale and discontinued operations Cases Véronique Weets November 27, 2008 1

Cases TABLE OF CONTENT Table of content... 2 Non-current assets held for sale and discontinued operations... 3 Classification of non-current assets (or disposal groups) as held for sale... 3 Exception to the one-year requirement... 4 Measurement of assets held for sale... 6 Discontinued operations... 8 November 27, 2008 2

Classification of non-current assets held for sale and discontinued operations NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS) AS HELD FOR SALE 1. An entity is committed to a plan to sell its headquarters building and has initiated actions to locate a buyer a. The entity intends to transfer the building to a buyer after it vacates the building. The time necessary to vacate the building is usual and customary for sales of such assets. b. The entity will continue to use the building until construction of a new headquarters building is completed. The entity does not intend to transfer the existing building to a buyer until after construction of the new building is completed (and it vacates the existing building). Determine if the availability for immediate sale criterion is met 2. An entity is committed to a plan to sell a manufacturing facility and has initiated actions to locate a buyer. At the plan commitment date, there is a backlog of uncompleted customer orders. a. The entity intends to sell the manufacturing facility with its operations. Any uncompleted customer orders at the sale date will be transferred to the buyer. b. The entity intends to sell the manufacturing facility, but it without its operations. The entity does not intend to transfer the facility to a buyer until after it ceases all operations of the facility and eliminates the backlog of uncompleted customer orders. Determine if the availability for immediate sale criterion is met 3. An entity acquires through foreclosure a property comprising land and buildings that it intends to sell. a. The entity does not intend to transfer the property to a buyer until after it completes renovations to increase the property s sales value. b. After renovations are completed and the property is classified as held for sale but before a firm purchase commitment is obtained, the entity becomes aware of environmental damage requiring remediation. The entity still intends to sell the property. However, the entity does not have the ability to transfer the property to a buyer until after the remediation is completed. Determine if the availability for immediate sale criterion is met 4. An entity that is a commercial leasing and finance company is holding for sale or lease equipment that has recently ceased to be leased and the ultimate form of a future transaction (sale or lease) has not yet been determined. Determine if the Completion of sale expected within one year criterion is met 5. An entity is committed to a plan to sell a property that is in use, and the transfer of the property will be accounted for as a sale and finance leaseback. November 27, 2008 3

Exception to the one-year requirement EXCEPTION TO THE ONE-YEAR REQUIREMENT in the limited situations in which the period required to complete the sale of a non-current asset (or disposal group) will be (or has been) extended by events or circumstances beyond an entity s control and there is sufficient evidence that the entity remains committed to its plan to sell the asset (disposal group) the asset (or disposal group) continues to be classified as held for sale. B1 An exception to the one-year requirement in paragraph 8 shall therefore apply in the following situations in which such events or circumstances arise: (a) At the date an entity commits itself to a plan to sell a non-current asset (or disposal group) it reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset (or disposal group) that will extend the period required to complete the sale, and: (i) actions necessary to respond to those conditions cannot be initiated until after a firm purchase commitment is obtained, and (ii) a firm purchase commitment is highly probable within one year. (b) An entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly impose conditions on the transfer of a non-current asset (or disposal group) previously classified as held for sale that will extend the period required to complete the sale, and: (i) timely actions necessary to respond to the conditions have been taken, and (ii) a favourable resolution of the delaying factors is expected. (c) During the initial one-year period, circumstances arise that were previously considered unlikely and, as a result, a non-current asset (or disposal group) previously classified as held for sale is not sold by the end of that period, and: (i) during the initial one-year period the entity took action necessary to respond to the change in circumstances, (ii) the non-current asset (or disposal group) is being actively marketed at a price that is reasonable, given the change in circumstances, and (iii) the criteria in paragraphs 7 and 8 are met. November 27, 2008 4

Measurement of assets held for sale MEASUREMENT OF ASSETS HELD FOR SALE 1. Describe how company A has to account for each of the following situations. Should the old copier been classified as a non-current asset held for sale? If so for which amount and when should company A recognize the old copier as a non-current asset held for sale? a. On 20 February Company A bought a new copy machine costing 18 000 CU and discontinued using its old copier, which had a carrying amount of 3 000 CU. The old copier was not working well, in need of repairs and on 25 February was moved to a storage location. b. Company A and Company B made an agreement on 1 February to exchange their copy machines. The carrying amount of Company A s copier was 16 000 CU and fair value was 14 500 CU. On 20 February Company A installed the new copy machine and discontinued using its old copier. There were no additional costs associated with the exchange. c. On 1 July Company A bought a new copy machine and discontinued using its the old copier. Company A immediately put the old copier on the market for sale. The carrying value of the old copier was 10 000 CU. Company A had been depreciating the asset using the straight-line method with total annual depreciation expense of 1 200 CU and depreciation had been recorded properly to 1 July. The fair value less costs to sell of the old copier as of 1 July was 9 400 CU. The copier did not sell and on 30 September Company A installed the copier in one of its branches and began using it. Recoverable amount of the copier as of 30 September was 9 000 CU. d. On 1 December 20X3 Company A bought a new copy machine and discontinued using its old copier. Company A immediately put the old copier on the market for sale. The carrying amount of the old copier was 19000 CU as of 1 December and its fair value less costs to sell was 21000 CU. Early in 20X4 a revolutionary new copier technology appeared on the market and as a result there were no buyers interested in the old copier. Company A continued trying to sell the copier, reduced the requested sale price of the copier several times throughout 20X4 and the copier was finally sold early in 2005. Company A is aware that IFRS 5 indicates that an asset classified as held for sale should be recognized as a completed sale within one year, unless the situation qualifies for an extension of the period required to complete a sale. Company management wants to insure that the asset is properly classified on the 31 December 20X4 balance sheet. November 27, 2008 6

Measurement of assets held for sale 2. Wilberforce plc prepares annual financial statements to 30 June. On 1 March 2008, the company classifies a non-current asset as held for sale. The asset is eventually sold in July 2008. Calculate, for the following situations a. Any impairment losses or gains that should be recognised in the financial statements for the year to 30 June 2008, and b. Any gain or loss on disposal that should be recognised in the financial statements for the year to 30 June 2009. CA 1/3/2008 FV 1/3/2008 Impairment 1/3/2008 FV 30/6/2008 Impairment 30/6/2008 Sales proceeds 1/3/2008 6 000 5 400 5 200 5 140 6 000 6 800 6 750 6 630 6 000 5 900 5 950 5 920 6 000 5 900 6 050 6 080 Gain/loss 30/6/2008 (Melville, ex 8.2) 3. Young and Sons Ltd prepares annual financial statements to 31 May. On 25 January 2008, the company classified a disposal group as held for sale. This disposal group was eventually old in August 2008. The carrying amounts of the assets and liabilities in the disposal group at 25 January 2008 and the carrying amounts at which these assets and liabilities would have been measured at 31 May 2008 if the group had not been held for sale are as follows: 25 January 2008 31 May 2008 Goodwill 200 150 Property, plant and 2 100 1 900 equipment Investment properties 700 760 Inventories 420 380 Liabilities (360) (360 The fair value (less costs to sell) of the disposal group was 3000 at 25 January 2008 and 2 850 at 31 May 2008. The group was sold in August 2008 for 2 800. a. Calculate the amount of any impairment losses or gains that should be recognised at 25 January 2008 and at 31 May 2008. b. Calculate the gain or loss arising on the sale of the disposal group November 27, 2008 7

Discontinued operations DISCONTINUED OPERATIONS 1. The draft income statement of Anderson Ltd for the year to 30 April 2008 is as follows: Sales revenue 558 Cost of sales 184 Gross profit 374 Other income 12 386 Distribution costs 59 Administrative expenses 148 207 Profit before tax 179 Taxation 45 Profit for the year 134 In January 2008, the company sold one of its business operations, incurring a loss of 17 on the sale. This loss is included in administrative expenses. The associated tax relief of 4 has been deducted when computing the tax expense shown in the income statement. The operation sold in January 2008 yielded sales revenue of 103 during the year to 30 April 2008. Related costs were cost of sales 38, distribution costs 2 and administrative expenses 20. The tax expense shown in the income statement includes 11 in relation to the profit made by this operation. Re-draft the above income statement in accordance with the requirements of IFRS 5 and draft a suitable note relating to discontinued operations which should appear in the notes to the financial statements. 2. Entity A acquires an entity H, which is a holding company with two subsidiaries, S1 and S2. S2 is acquired exclusively with a view to sale and meets the criteria to be classified as held for sale. In accordance with paragraph 32(c), S2 is also a discontinued operation. The estimated fair value less costs to sell of S2 is CU135. The fair value of the identifiable liabilities of S2 at the acquisition date is CU40.At the end of the reporting period the lower of cost and fair value less cost to sell of S2 is 130. In accordance with IAS 39 the liabilities measure CU 35. How should A account for S2? November 27, 2008 8

Solutions IFRS 5 Non-current assets held for sale and discontinued operations Solutions Véronique Weets November 27, 2008 1

Solutions TABLE OF CONTENT Table of content... 2 Non-current assets held for sale and discontinued operations... 3 Classification of non-current assets (or disposal groups) as held for sale... 3 exception to the one-year requirement... 5 Measurement of assets held for sale... 7 Discontinued operations... 11 November 27, 2008 2

Classification of non-current assets held for sale and discontinued operations NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS) AS HELD FOR SALE 1. An entity is committed to a plan to sell its headquarters building and has initiated actions to locate a buyer a. The entity intends to transfer the building to a buyer after it vacates the building. The time necessary to vacate the building is usual and customary for sales of such assets. b. The entity will continue to use the building until construction of a new headquarters building is completed. The entity does not intend to transfer the existing building to a buyer until after construction of the new building is completed (and it vacates the existing building). Determine if the availability for immediate sale criterion is met In case a) the criterion would be met at the plan commitment date, in case b) the delay in the timing of the transfer of the existing building imposed by the entity (seller) demonstrates that the building is not available for immediate sale. The criterion would not be met until construction of the new building is completed, even if a firm purchase commitment for the future transfer of the existing building is obtained earlier. 2. An entity is committed to a plan to sell a manufacturing facility and has initiated actions to locate a buyer. At the plan commitment date, there is a backlog of uncompleted customer orders. a. The entity intends to sell the manufacturing facility with its operations. Any uncompleted customer orders at the sale date will be transferred to the buyer. b. The entity intends to sell the manufacturing facility, but it without its operations. The entity does not intend to transfer the facility to a buyer until after it ceases all operations of the facility and eliminates the backlog of uncompleted customer orders. Determine if the availability for immediate sale criterion is met In case a) the transfer of uncompleted customer orders at the sale date will not affect the timing of the transfer of the facility. The criterion would be met at the plan commitment date. In case b) the delay in the timing of the transfer of the facility imposed by the entity (seller) demonstrates that the facility is not available for immediate sale. The criterion would not be met until the operations of the facility cease, even if a firm purchase commitment for the future transfer of the facility were obtained earlier. 3. An entity acquires through foreclosure a property comprising land and buildings that it intends to sell. a. The entity does not intend to transfer the property to a buyer until after it completes renovations to increase the property s sales value. b. After renovations are completed and the property is classified as held for sale but before a firm purchase commitment is obtained, the entity becomes aware of environmental damage requiring remediation. The entity still intends to sell the property. However, the entity does not have the ability to transfer the property to a buyer until after the remediation is completed. Determine if the availability for immediate sale criterion is met In case a) the delay in the timing of the transfer of the property imposed by the entity (seller) demonstrates that the property is not available for immediate sale. The criterion would not be met until the renovations are completed. In case b) the delay in the timing of the transfer of the property imposed by others before a firm purchase commitment is obtained demonstrates that the property is not available for immediate sale. The criterion would not continue to be met. The property would be reclassified as held and used. November 27, 2008 3

Classification of non-current assets held for sale and discontinued operations 4. An entity that is a commercial leasing and finance company is holding for sale or lease equipment that has recently ceased to be leased and the ultimate form of a future transaction (sale or lease) has not yet been determined. Determine if the Completion of sale expected within one year criterion is met No the sale is not highly probable. 5. An entity is committed to a plan to sell a property that is in use, and the transfer of the property will be accounted for as a sale and finance leaseback. No there will be not qualification for derecognition November 27, 2008 4

Exception to the one-year requirement Determine for the following situations whether the asset can continue to be classified as held for sale 1. An entity in the power generating industry is committed to a plan to sell a disposal group that represents a significant portion of its regulated operations. The sale requires regulatory approval, which could extend the period required to complete the sale beyond one year. Actions necessary to obtain that approval cannot be initiated until after a buyer is known and a firm purchase commitment is obtained. However, a firm purchase commitment is highly probable within one year. In that situation, the conditions in paragraph B1(a) for an exception to the one-year requirement in paragraph 8 would be met. 2. An entity is committed to a plan to sell a manufacturing facility in its present condition and classifies the facility as held for sale at that date. After a firm purchase commitment is obtained, the buyer's inspection of the property identifies environmental damage not previously known to exist. The entity is required by the buyer to make good the damage, which will extend the period required to complete the sale beyond one year. However, the entity has initiated actions to make good the damage, and satisfactory rectification of the damage is highly probable. In that situation, the conditions in paragraph B1(b) for an exception to the one-year requirement in paragraph 8 would be met. 3. An entity is committed to a plan to sell a non-current asset and classifies the asset as held for sale at that date. a. During the initial one-year period, the market conditions that existed at the date the asset was classified initially as held for sale deteriorate and, as a result, the asset is not sold by the end of that period. During that period, the entity actively solicited but did not receive any reasonable offers to purchase the asset and, in response, reduced the price. The asset continues to be actively marketed at a price that is reasonable given the change in market conditions Since the asset continues to be actively marketed at a price that is reasonable given the change in market conditions the criteria in paragraphs 7 and 8 are met. In that situation, the conditions in paragraph B1(c) for an exception to the one-year requirement in paragraph 8 would be met. At the end of the initial oneyear period, the asset would continue to be classified as held for sale. b. During the following one-year period, market conditions deteriorate further, and the asset is not sold by the end of that period. The entity believes that the market conditions will improve and has not further reduced the price of the asset. The asset continues to be held for sale, but at a price in excess of its current fair value. In that situation, the absence of a price reduction demonstrates that the asset is not available for immediate sale as required by paragraph 7. In addition, paragraph 8 also requires an asset to be marketed at a price that is reasonable in relation to its current fair value. Therefore, the conditions in paragraph B1(c) for an exception to the one-year requirement in paragraph 8 would not be met. The asset would be reclassified as held and used in accordance with paragraph 26. November 27, 2008 6

Measurement of assets held for sale MEASUREMENT OF ASSETS HELD FOR SALE 1. Describe how company A has to account for each of the following situations. Should the old copier been classified as a non-current asset held for sale? If so for which amount and when should company A recognize the old copier as a non-current asset held for sale? a. On 20 February Company A bought a new copy machine costing 18 000 CU and discontinued using its old copier, which had a carrying amount of 3 000 CU. The old copier was not working well, in need of repairs and on 25 February was moved to a storage location. The old copier should not be classified as held for sale since there is no plan for disposal. The Company will continue depreciating the asset in accordance with IAS 16 even though it is no longer in use. Company A should also assess the situation and take into consideration whether the asset requires testing for impairment. b. Company A and Company B made an agreement on 1 February to exchange their copy machines. The carrying amount of Company A s copier was 16 000 CU and fair value was 14 500 CU. On 20 February Company A installed the new copy machine and discontinued using its old copier. There were no additional costs associated with the exchange. The old copier should be classified as held for sale. Sales transactions include the exchange of non-current assets for purposes of applying IFRS 5. The old copier should be classified as held for sale on 1 February. The asset should be measured at the lower of its carrying amount and fair value less costs to sell when it is classified as held for sale. Since there are no costs to sell the copier should be valued at 14 500. Company A will recognize a loss of 1 500. c. On 1 July Company A bought a new copy machine and discontinued using its the old copier. Company A immediately put the old copier on the market for sale. The carrying value of the old copier was 10 000 CU. Company A had been depreciating the asset using the straight-line method with total annual depreciation expense of 1 200 CU and depreciation had been recorded properly to 1 July. The fair value less costs to sell of the old copier as of 1 July was 9 400 CU. The copier did not sell and on 30 September Company A installed the copier in one of its branches and began using it. Recoverable amount of the copier as of 30 September was 9 000 CU. The copier should change classification to held for sale and then when circumstances change, should be reclassified again back to fixed assets. The copier should be classified as held for sale on 1 July and should be reclassified to fixed assets on 30 September. The copier should be valued at 9 400 on 1 July. Applying IAS 16 as required, to revalue the asset prior to change in classification, the Company will recognize a loss of 600 which is the difference between carrying amount and recoverable value (this assumes that fair value less costs to sell is equal to value in use since the Company s plan is to dispose of the asset). The copier must be revalued on 30 September when classification changes back to fixed assets. The valuation must be the lower of its recoverable amount at the date of reclassification, and the carrying amount before classification as held for sale, adjusted for depreciation as if it had remained classified as a fixed asset. The carrying amount before classification as held for sale, adjusted for depreciation as if it had remained classified as a fixed asset is 10 000 3 months of depreciation= 9700. This is higher than the recoverable November 27, 2008 7

Measurement of assets held for sale amount of 9 000. Company A must adjust the value of the asset from its current carrying amount of 9400 down to 9000 and recognize a loss of 400. d. On 1 December 20X3 Company A bought a new copy machine and discontinued using its old copier. Company A immediately put the old copier on the market for sale. The carrying amount of the old copier was 19000 CU as of 1 December and its fair value less costs to sell was 21000 CU. Early in 20X4 a revolutionary new copier technology appeared on the market and as a result there were no buyers interested in the old copier. Company A continued trying to sell the copier, reduced the requested sale price of the copier several times throughout 20X4 and the copier was finally sold early in 2005. Company A is aware that IFRS 5 indicates that an asset classified as held for sale should be recognized as a completed sale within one year, unless the situation qualifies for an extension of the period required to complete a sale. Company management wants to insure that the asset is properly classified on the 31 December 20X4 balance sheet. The old copier should be classified as held for sale and remain classified as held for sale although a sale did not occur within one year. This situation qualifies for an extension based on the following criteria: during the initial one-year period, circumstances arise that were previously considered unlikely and, as a result, a non-current asset that was previously classified as held for sale is not sold by the end of that period, and: during the initial one-year period the entity took action necessary to respond to the change in circumstances, the non-current asset is being actively marketed at a price that is reasonable, given the change in circumstances, and the classification criteria for a held to sale asset are met The copier should be classified as held for sale on 1 December 20X3. The asset will be valued at 19 000 because the carrying amount is less than fair value less costs to sell. Company A should verify again on the balance sheet dates that the fair value less costs to sell is higher than the asset s carrying amount. If fair value less costs to sell falls below carrying amount the Company must adjust the balance of the asset account and recognize a loss for the decline in value. November 27, 2008 8

Measurement of assets held for sale 2. Wilberforce plc prepares annual financial statements to 30 June. On 1 March 2008, the company classifies a non-current asset as held for sale. The asset is eventually sold in July 2008. Calculate, for the following situations a. Any impairment losses or gains that should be recognised in the financial statements for the year to 30 June 2008, and b. Any gain or loss on disposal that should be recognised in the financial statements for the year to 30 June 2009. CA 1/3/2008 FV 1/3/2008 Impairment 1/3/2008 FV 30/6/2008 Impairment 30/6/2008 Sales proceeds 1/3/2008 Gain/loss 30/6/2008 6 000 5 400 600 5 200 200 5 140 60 6 000 6 800-6 750-6 630 630 6 000 5 900 100 5 950-50 5 920-30 6 000 5 900 100 6 050-100 6 080 80 (Melville, ex 8.2) 3. Young and Sons Ltd prepares annual financial statements to 31 May. On 25 January 2008, the company classified a disposal group as held for sale. This disposal group was eventually old in August 2008. The carrying amounts of the assets and liabilities in the disposal group at 25 January 2008 and the carrying amounts at which these assets and liabilities would have been measured at 31 May 2008 if the group had not been held for sale are as follows: 25 January 2008 31 May 2008 Goodwill 200 150 Property, plant and 2 100 1 900 equipment Investment properties 700 760 Inventories 420 380 Liabilities (360) (360 The fair value (less costs to sell) of the disposal group was 3000 at 25 January 2008 and 2 850 at 31 May 2008. The group was sold in August 2008 for 2 800. a. Calculate the amount of any impairment losses or gains that should be recognised at 25 January 2008 and at 31 May 2008. 25 January 2008 After allocation of impairment loss on 25/1/2008 Goodwill 200 140 Property, plant and 2 100 2 100 equipment Investment properties 700 700 Inventories 420 420 Liabilities (360) (360) 3 060 3 000 November 27, 2008 9

Measurement of assets held for sale After allocation of impairment loss on 25/1/2008 Application of other IFRSs After allocation of impairment loss on 31/3/2008 Goodwill 140 140 - Property, plant and 2 100 2 100 2 070 equipment Investment properties 700 760 760 Inventories 420 380 380 Liabilities (360) (360) (360) 3 000 3 020 2 850 b. Calculate the gain or loss arising on the sale of the disposal group There is a loss of 50. (Melville, example 8.5) November 27, 2008 10

Discontinued operations DISCONTINUED OPERATIONS 1. The draft income statement of Anderson Ltd for the year to 30 April 2008 is as follows: Sales revenue 558 Cost of sales 184 Gross profit 374 Other income 12 386 Distribution costs 59 Administrative expenses 148 207 Profit before tax 179 Taxation 45 Profit for the year 134 In January 2008, the company sold one of its business operations, incurring a loss of 17 on the sale. This loss is included in administrative expenses. The associated tax relief of 4 has been deducted when computing the tax expense shown in the income statement. The operation sold in January 2008 yielded sales revenue of 103 during the year to 30 April 2008. Related costs were cost of sales 38, distribution costs 2 and administrative expenses 20. The tax expense shown in the income statement includes 11 in relation to the profit made by this operation. Re-draft the above income statement in accordance with the requirements of IFRS 5 and draft a suitable note relating to discontinued operations which should appear in the notes to the financial statements. Continuing operations Sales revenue 455 Cost of sales 146 Gross profit 309 Other income 12 321 Distribution costs 57 Administrative expenses 111 168 Profit before tax from continuing operations 153 Taxation 38 Profit for the year 115 Discontinued operations Profit before tax from discontinued operations 19 Profit for the year 134 There would be a note showing that the profit from discontinued operations is as follows: Sales revenue 103 Cost of sales 38 Gross profit 65 Distribution costs 2 Administrative expenses 20 22 Profit before tax 43 Taxation 11 Profit for the year 32 Loss on disposal of assets (17) Tax relief 4 (13) Profit from discontinued operations 19 November 27, 2008 11

Discontinued operations This note could be less detailed if some of the figures concerned are thought not to be material. (Melville, example 8.6) 2. Entity A acquires an entity H, which is a holding company with two subsidiaries, S1 and S2. S2 is acquired exclusively with a view to sale and meets the criteria to be classified as held for sale. In accordance with paragraph 32(c), S2 is also a discontinued operation. The estimated fair value less costs to sell of S2 is CU135. The fair value of the identifiable liabilities of S2 at the acquisition date is CU40.At the end of the reporting period the lower of cost and fair value less cost to sell of S2 is 130. In accordance with IAS 39 the liabilities measure CU 35. How should A account for S2? initially, A measures the identifiable liabilities of S2 at fair value CU40 and its acquired assets at CU 175 (135+40) at the end of the reporting period, A remeasures the disposal group at the lower of its cost and fair value less costs to sell at CU130. The liabilities are remeasured at CU35. The total assets are measured at CU130 + CU35, ie at CU165 at the end of the reporting period, A presents the assets and liabilities separately from other assets and liabilities in its consolidated financial statements as a disposal groups classified as held for sale, and in the statement of comprehensive income, A presents the total of the post-tax profit or loss of S2 and the post-tax gain or loss recognised on the subsequent remeasurement of S2, which equals the remeasurement of the disposal group from CU135 to CU130. November 27, 2008 12