Non-current assets held for sale

A non-current asset held for sale is an asset whose intention on the part of a company is to dispose it rather than its use in the production, supply of goods and services, for administrative purposes or earn rentals or for capital appreciation.

 

In other words, an asset held to be classified for sale is not a property plant and equipment, or an investment property.

 

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What are non-current assets?

Paragraph 66 of IAS 1 lists the characteristics of current assets.

 

Non-current assets will be all those the assets not contemplated in this paragraph:

 

 

An entity shall classify an asset as current when:

 

 

  • It is expected to be sold or consumed in the normal course of business, such as inventories.
 
  • Assets held primarily for trading purposes, such as investments.
 
  • Assets that are expected to be realized within the twelve months following the final reporting period.
 
  • Cash and cash equivalents 

Examples of non-current assets:

 

  • Property plant and equipment
  • Intangibles.
  • Investment properties.
  • Bearer plants.
  • Deferred tax assets.

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Requirements to classify a non-current asset as held for sale:

Many accountants make the mistake of classifying a non-current asset as held for sale because the company’s management has the expectation that it will sell it in the near future.

 

however, it’s not as simple as you might think the majority of people, because for classify non-current asset as a held for sale is necessary to meet 3 requirements established in paragraph 7 of IFRS 5 must be met.

 

That the asset is available for immediate sale.

 

That the sales agreements between the parties conform to the   customary terms of sale.

 

Its sale is probable.

 

That the asset is available for immediate sale:

A company may own real estates that is currently being used by the entity, ie, these assets have the quality to be of property, plant and equipment because they are mainly held for their use, however, it may happen that management takes the decision to sell some of these assets, whether for legal, strategic, corporate or other issues.

 

Therefore, at the time the negotiation with the buyer is established, there must be a reasonable time to deliver the property, for example, if an entity decides to sell one of its buildings where its administrative offices operate, and it is reached an agreement where the entity agrees with the buyer to deliver the asset within a period of 6 months, it is reasonable that the company can classify the asset as held for sale, since there is an intention of the parties to close the agreement.

 

In this way, if we take the previous example as a reference, but on this occasion the entity first needs to build a headquarters to be able to transfer its administrative workers, obviously, the entity does not intend to sell the asset, since the time of delivery of the asset  is very extensive ,ie, the company could take several years to have another headquarters before leaving the current one.

 

To know what is the reasonable time between which the sale is closed with the buyer and the asset must be delivered, in general, this should not be longer than an accounting period.

That the sales agreements between the parties conform to the customary terms of sale.

When referring to usual and customary conditions, the standard it refers to a sale that is agreed according to the commercial practices of most transactions of this type, in other words, if the negotiations for the sale of a non-current asset such as a building or a warehouse, is of such a nature and complexity that its conclusion can be extended beyond the normal terms, an entity should not classify these assets as held for sale, until there is more certainty about the transaction completion.

That its sale is probable.

In addition to the aforementioned requirements, paragraph 8 of IFRS 5 indicates one more requirement, that the sale its make  probable, this means it’s necessary to meet the following characteristics shown in the following diagram to classify a non-current asset as held for sale.

paragraph 8 - IFRS 5

Exception from compliance with paragraphs 7 and 8 IFRS 5

Paragraph 9 of IFRS 5 establishes that there may be facts and circumstances that could lengthen the period to complete the sale beyond one year, if this extension in the term is determined by situations that are beyond the control of the company, this paragraph allows an entity to classify a non-current asset as held for sale, even if completion of the arrangement is deferred beyond 12 months.

 

For example, an entity agrees with a buyer the sale of a specialized machine, the negotiation closes at the beginning of year 1, however, according to the buyer’s requirements, the sale will be completed within a period of 18 months due to that the buyer needs to make some modifications to his warehouse for the asset to function properly, when this type of events occurs, the asset may be classified as held for sale regardless of whether the sale is concluded beyond an accounting period.

 

As can be seen, the previous paragraph only applies when there are conditions that are beyond the control of the entity.

How is a non-current asset held for sale accounted ?

accounting recognition non-current asset held for sale accounted

When an entity meets the requirements set out in paragraphs 7 and 8 of IFRS 5, an entity shall measure the asset lower of its carrying amount and fair value less costs to sell.

 

It is important to say that once the non-current asset is classified as held for sale, depreciation must stop.

 

It should be reviewed later if the asset classified as held for sale has shown impairment, in which case a reduction in the cost of the asset should be made and a loss in profit or loss should be recognized, however, if for any eventuality, the company reverses this impairment, an income must be recognized in profit and loss but without exceeding the accumulated impairment loss that has been recognized.

 

For example: at the end of year 1, the carrying amount of a non-current asset held for sale amounts to 250,000 and its recoverable amount is 210,000, in this case, the entity must recognize an impairment of 40,000 that is accounted for as a lower value of the asset against an expense.

 

At the end of year 2, the recoverable amount of the asset is 240,000, in this case the company must recognize an income in results against an increase in the value of the asset for 30,000.

 

In December of year 3, the recoverable amount of the asset is 260,000, in this case, the entity must recognize an income only for 10,000, since according to paragraph 21 of IFRS 5, the reversal of the impairment should never exceed the impairment accumulated previously recognized.

Example of a non-current asset held for sale

A company acquires a building in January of year 1 for 150,000, the useful life of the asset is 50 years, at the end of year 6, the entity intends to sell the property, management considers that it meets all the requirements established in the paragraphs 7 and 8 of IFRS 5 in order to classify the asset as held for sale, except that the active search for a buyer has not started.

In January of year 8, the entity begins the active search for a buyer.

In December of year 8, the recoverable amount of the asset is: 120,000.

Make the accounting entries of the proposed example.

Accounting recognition of the acquisition of property, plant and equipment

 

Recognition 1 - IFRS5

The entity must recognize the accumulated depreciation of the asset until the end of year 7, since by the end of year 6, the company had not met all the requirements to classify the asset as held for sale.

recognition33

The carrying amount is as follows:

 

Historical cost: 150,000

Accumulated depreciation: 21,000

Carrying amount: 129,000

Recognition 3 - IFRS5

To calculate whether there is impairment, the carrying amount must be compared to the recoverable amount, if the recoverable amount is below, an impairment loss must be recognized for the difference.

 

Carrying amount vs recoverable amount.

 

129.000 vs 120.000 = 9.000

ifrs 5 Co-min
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