A non-current asset held for sale is an asset whose intention on the part of a company is to dispose of 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, equipment, or investment property.
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 ordinary course of business, such as the inventories, for example.
- Assets are held primarily for trading purposes, such as the investments.
- Assets are expected to be realized within the twelve months following the final reporting period.
- The asset is cash or a cash equivalent
Examples of non-current assets:
- Property plant and equipment
- Investment properties.
- Bearer plants.
- Deferred tax assets.
Requirements to classify a non-current asset as held for sale:
Many accountants mistake of classifying a non-current asset as held for sale because the company’s management expects sale it in some time.
However, it’s not as simple as you might think to the majority of people because to classify a non-current asset as a held for sale is necessary to meet three requirements established in paragraph 7 of IFRS 5.
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 estate currently being used.
In other words, these assets have the quality to be of property, plant, and equipment because they are mainly held for their use.
However, management may decide to sell some of these assets, whether for legal, strategic, or corporate reasons.
Therefore, when the buyer’s negotiation is established with the entity, 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 sets with the buyer to deliver the asset within six 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.
That is, the company could take several years to have another headquarters before leaving the current one.
To know the reasonable time between the sale is closed with the buyer and the asset must be delivered, this should not be longer than an accounting period.
Condition subject only to terms that are usual and customary for sales of such assets
When referring to usual conditions, the standard refers to a sale agreed upon 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 less uncertainty about the transaction completion.
That its sale is probable.
In addition to the requirements above, paragraph 8 of IFRS 5 indicates one more condition.
The sale must be probable, so it’s necessary to meet the following characteristics shown in the next diagram to classify a non-current asset as held for sale
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 we suppose this extension in the term is determined by situations beyond the company’s control, 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 on selling a specialized machine.
The negotiation closes at the beginning of year 1.
However, according to the buyer’s requirements, the sale will be completed after 18 months, because the buyer needs to make some modifications to his warehouse for the asset to function properly.
When this event occurs, the asset may be classified as held for sale regardless of whether the sale is concluded beyond an accounting period.
The previous paragraph only applies when there are conditions beyond the entity’s control.
How is a non-current asset held for sale accounted ?
When an entity meets the requirements set out in paragraphs 7 and 8 of IFRS 5, it shall measure the asset at the lowest of its carrying amount and fair value less costs to sell.
It is important to say that depreciation must stop once the non-current asset is classified as held for sale.
It should be reviewed later if the asset classified as held for sale has shown impairment.
In this case, it’s necessary to recognize a reduction in the asset’s cost due to recognizing an impairment loss.
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 is equal 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 asset value against an expense.
At the end of year 2, the asset’s recoverable amount increase to 240,000.
In this event, the company must recognize an income in results against an increase in the asset’s value of 30,000.
Now, in December of year 3, the asset’s recoverable amount is 260,000.
In this opportunity, the entity must recognize an income only of 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 asset’s useful life 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 paragraphs 7 and 8 of IFRS 5 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 asset’s recoverable amount is equal to 120,000.
Make the accounting entries of the proposed example.
Accounting recognition of the acquisition of property, plant and equipment
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.
The carrying amount is as follows:
Historical cost: 150,000
Accumulated depreciation: 21,000
Carrying amount: 129,000
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
Non-current assets held for sale accounting recognition are regulated in IFRS 5. This standard determines that the assets can be