Topic: IFRS 5: Non-current assets held for sale and discontinued operations

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  • 5 Marks

CR – May 2018 – L3 – Q2d – IFRS 5: Non-current Assets Held for Sale and Discontinued Operations

Explain whether certain scenarios meet the criteria for classification as discontinued operations under IFRS 5.

Explain with justification, whether each of the following could most likely be classified as a discontinued operation under IFRS 5: Non-current Assets Held for Sale and Discontinued Operations in this year’s financial statements:
i) A reportable operating segment that met the definition of held for sale after the year-end but before the financial statements were authorised for issue. (1 mark)
ii) A reportable operating segment that was closed down during the financial year. The assets of the segment were broken up and used in other divisions of the company. (2 marks)
iii) A division of a business, classified as held for sale, that was correctly treated as a discontinued operation in last year’s financial statements, but which has not been sold by this year-end due to the sale being referred to the National Insurance Commission, which regulates the insurance industry. The commission is not expected to report its findings until 6 months after this year-end. (2 marks)

i) Held for sale after year-end:
A reportable operating segment that meets the criteria for being classified as held for sale after the year-end, but before the financial statements are authorized for issue, would not qualify as a discontinued operation under IFRS 5. This is because the classification as “held for sale” occurred after the reporting date, making it a non-adjusting event under IAS 10 (Events After the Reporting Period). (1 mark)

ii) Operating segment closed down during the year:
A reportable operating segment that was closed down during the year and whose assets were broken up and used in other divisions would most likely be classified as a discontinued operation. The closing of the segment during the financial year represents a significant disposal, and even though the assets were redeployed within the company, the segment’s operations were effectively discontinued. Therefore, it meets the criteria for classification as a discontinued operation. (2 marks)

iii) Not sold within the 12-month period:
A division classified as held for sale in the prior year but not sold within 12 months does not automatically lose its discontinued operation classification. IFRS 5 allows an extension beyond 12 months if the delay is due to events beyond the entity’s control, such as regulatory requirements. In this case, the delay in the sale is due to the National Insurance Commission’s review, which is beyond the company’s control. Therefore, the division can continue to be classified as a discontinued operation. (2 marks)

  • 5 Marks

CR – Nov 2018 – L3 – Q2a – Non-current assets held for sale and discontinued operations

Discuss the financial reporting issues for Builsa Ltd regarding the planned closure of a division and the redundancy of employees under IFRS 5.

Builsa Ltd (Builsa) is a listed company that assembles personal computers (PCs), and it is preparing its financial statements for the year ended 31 May 2018. Builsa plans to close down one of its divisions. This division, which is classified as a separate business segment, will cease all of its activities on 31 July 2018. Most of the assets of the business will be redeployed elsewhere in Builsa’s business; however, some smaller items of plant will be sold off or scrapped. Approximately half of the staff of the division will be made redundant, and they were notified of the decision in late May 2018. Customers and suppliers were notified at the same time. The annual 2018 financial statements are scheduled to be released to the markets on 9 August 2018.

Required:
Advise the directors as to the financial reporting issues arising from the above matters and explain the appropriate treatment in Builsa’s financial statements in each case.

  1. Discontinued Operations – IFRS 5:
    • The closure of the division must be assessed for classification as a discontinued operation. Under IFRS 5, a discontinued operation is defined as a 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 geographical area of operations.
    • Since the division is classified as a separate business segment and will cease all activities, it can be considered a discontinued operation for financial reporting purposes, assuming all relevant criteria are met. However, since most assets will be redeployed rather than sold, this may not fully meet the definition of held for sale.
    • The smaller assets that are to be sold or scrapped may be classified as assets held for sale under IFRS 5 if they meet the relevant criteria.
  2. Provision for Redundancy – IAS 37:
    • A provision for redundancy costs should be recognized under IAS 37 if a constructive obligation exists at the year-end. Since the decision has been communicated to the employees in late May 2018, and individual employees have been identified for redundancy, a provision for redundancy costs should be recognized in the financial statements for the year ended 31 May 2018.
  3. Non-adjusting Event – IAS 10:
    • The division’s closure is scheduled for 31 July 2018, after the reporting date of 31 May 2018. Since the closure has a significant impact on the business, it should be disclosed as a non-adjusting event in the 2018 financial statements under IAS 10 (Events After the Reporting Period), as it does not adjust the financial position as of the reporting date but is material and must be disclosed.

Conclusion:

  • The closure of the division should be treated as a discontinued operation only if the assets are classified as held for sale. Otherwise, certain assets may qualify as held for sale, and a provision for redundancy costs should be made. Additionally, the event should be disclosed as a non-adjusting event due to its materiality.
  • 20 Marks

CR – Aug 2022 – L3 – Q2 – IFRS 5: Non-current assets held for sale and discontinued operations | IAS 38: Intangible assets

This question focuses on the accounting treatment of non-current assets held for sale, leasebacks, franchise costs, and intangible asset amortization.

Unity Link Ltd (ULL) has enjoyed a significant market share in the southern part of Ghana over the years. However, ULL has suffered liquidity challenges due to the effects of the pandemic lockdown and its subsequent restrictions. ULL’s main source of income, dealings in luxury goods, has reduced significantly because customers have shifted their demand to necessities of life.

The following transactions were undertaken by ULL:

a) ULL has entered into a contract to sell one of their gold refinery equipment on 31 January 2023 and immediately lease it back. The Finance Director, in consultation with the Finance Manager, has decided to classify this transaction as a non-current asset “held for sale” in its financial statements for the year ended 31 December 2022 as he rates this transaction as highly probable. The market value for the gold refinery equipment has not changed in many years and is unlikely to change in the foreseeable future. The contract states that the gold refinery equipment should be disposed of at its fair value of GH¢6 million and for ULL to lease it back over a period of 10 years. It is estimated that GH¢400,000 is needed to refurbish the gold refinery equipment and there is no legal requirement to do so. ULL has in error treated this amount as a reduction of the asset’s carrying amount at 31 December 2022, and the corresponding debit has been made to profit or loss. The gold refinery equipment is depreciated at 5% per annum using the reducing balance method, and at 31 December 2022, the carrying amount after depreciation and deduction of the proposed cost of refurbishment is GH¢3.6 million. (7 marks)

b) ULL has established a chain of business franchise. This franchise was obtained from a foreign company. In this arrangement, dealers in luxury items, especially refined gold, obtain a franchise under a brand name “Lockhert” from ULL to sell its own refined gold. The budgeted costs of obtaining a franchise from a foreign company are based on the estimated revenues from the franchise given out to local companies. These costs of obtaining a franchise are then capitalised as an intangible asset and called “Franchise cost.” The Finance Director is convinced that the franchise is consumed as Franchisees produce their own refined gold. ULL currently amortises the franchise based on estimated future revenues from the franchise. For example, the franchise is estimated to generate GH¢1.6 million of revenue in total, and GH¢800,000 of that revenue will be generated in year one. The intangible asset will be amortised by 50% in year one. However, industry practice is to amortise the capitalised cost less its recoverable amount over its remaining useful life. (6 marks)

c) ULL’s franchise registration fee, which is separate from the franchise fee, is treated as an intangible asset and is initially recognised at the fair value of the consideration paid for the registration. Subsequent franchise fees, which are paid yearly, are subject to negotiation. The franchise contract has embedded contingent performance conditions where a franchisee may be paid a bonus based on an increase in sales. This bonus is an additional contract cost. ULL has reasoned that the only way to determine the value-in-use of the cost of the franchise is when a new customer takes over from an existing one who is prepared to sell his franchise. This treatment is what prevails in the industry. (7 marks)

Required:

In accordance with International Financial Reporting Standards, discuss the appropriate accounting treatment of the above transactions in the financial statements of ULL.

 

a) This scenario would be accounted for using the rules under IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, IAS 37: Provisions, Contingent Liabilities, and Contingent Assets, and IFRS 16: Leases.

  1. IFRS 5 addresses the accounting for assets classified as held for sale. It requires a non-current asset to be classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. It must be available for immediate sale in its present condition, and its sale must be highly probable within 12 months of classification as held for sale.

    Since ULL has entered into a firm sales commitment, the Finance Director is correct in classifying the equipment as held for sale. The equipment would be measured at the lower of carrying amount and fair value less cost of disposal, would not be depreciated any longer, and presented under current assets.

  2. The GH¢400,000 intended for refurbishment should not have been deducted from the asset’s carrying amount as there is no legal obligation to refurbish it under IAS 37. It should be added back and credited to profit or loss.
  3. In terms of IFRS 16: If the sale and leaseback agreement meets the requirements for recognition as a sale, ULL would derecognize the asset, recognize a lease liability, and a right-of-use asset proportionate to the previous carrying amount of the equipment.

(7 marks)

b) The franchise is considered an intangible asset under IAS 38. The franchise should be amortised based on the consumption of economic benefits, not on estimated future revenues.

  1. The use of revenue-based amortization contradicts IAS 38, which presumes that amortization based on revenue is inappropriate unless the relationship between revenue and consumption of the benefits of the intangible asset can be proven.
  2. ULL should amortize the franchise costs over the asset’s useful life using a systematic basis. The industry method based on useful life, adjusting for the recoverable amount, is more aligned with IAS 38.

(6 marks)

c) ULL’s treatment of the franchise registration fee as an intangible asset complies with IAS 38, provided the future economic benefits from the asset are probable and measurable.

  1. Any contingent performance conditions, like bonuses based on sales, should be included in the franchise’s value as additional contract costs under IAS 36, once the performance is likely.
  2. Value-in-use is calculated by the present value of expected future cash flows under IAS 36: Impairment of Assets. ULL must assess whether the franchise’s value-in-use can be determined on a standalone basis or as part of a cash-generating unit (CGU).
  • 4 Marks

CR – Nov 2019 – L3 – Q2b – IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations

Discuss the criteria for classifying an operation as discontinued and the accounting treatment involved.

b) IFRS 5: Non-current Assets Held for Sale and Discontinued Operations sets out the principles governing the measurement and presentation of non-current assets that are expected to be realised through sale rather than through continuing use. The standard also deals with reporting the results of operations that qualify as discontinued operations.

Required:
Identify TWO (2) conditions which must be present in order to present the results of an operation as “discontinued” and the accounting treatment that applies when such a classification is deemed appropriate.

(4 marks)

  • Conditions for Presenting Results as Discontinued Operations (IFRS 5):
    • Condition 1: Separate Major Line of Business or Geographical Area
      To classify an operation as discontinued, it must represent a separate major line of business or geographical area of operations. This could involve a business unit that is distinct from the entity’s other operations.
    • Condition 2: Plan to Sell the Operation
      The disposal of the operation must be part of a single co-ordinated plan to dispose of a separate major line of business or geographical area. The sale must be highly probable, and management should be committed to a sale that is expected to be completed within one year.
  • Accounting Treatment for Discontinued Operations:
    • Presentation in the Financial Statements:
      Results from discontinued operations must be presented separately in the statement of profit or loss. This includes the post-tax profit or loss from discontinued operations and any gain or loss on the disposal or remeasurement of assets classified as held for sale.
    • Measurement:
      Non-current assets classified as “held for sale” should be measured at the lower of carrying amount and fair value less costs to sell. Once classified as “held for sale,” these assets should no longer be depreciated or amortized.
  • 5 Marks

CR – Dec 2022 – L3 – Q2c -IFRS 5: Non-current assets held for sale and discontinued operations

Provide accounting treatment for Ayew Plc's plant reclassification under IFRS 5.

Ayew Plc (Ayew) decided to dispose of one of its major production plants, which had become surplus to requirement. At 31 January 2021, all criteria were met for the plant to be classified as held for sale. On 31 July 2022, there was material evidence that the original sale plan would change and hence, it was considered not appropriate to retain the plant as held-for-sale. The plant is carried under the cost model.

Details of the plant are as follows:

GH¢’million
Cost (acquired on 1 August 2019) 20
Depreciation rate (straight line to nil residual value) 10%
At 31 January 2022:
Fair value 14
Costs to sell 0.4
At 31 July 2022:
Recoverable amount 15.2

Required:
In line with IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations, recommend how the above would be accounted for within the financial statements of Ayew for the year ended 31 July 2022.
(Total: 5 marks)

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