Audit firms in Dubai, UAE deciding to sell an asset or close a section of its operations will have a considerable effect on profitability, cash flows and financial outlook. These events must be highlighted to the financial statement users. The IFRS was designed to address the results of continued activities and separate them from continued operations. The standard came to effect on 1st January 2005.
IFRS 5 Objective and Scope
This IFRS aims to describe the accounting for assets that are held for sale and the disclosure and presentation of discontinued operations. The IFRS also requires:
Assets that meet the criteria for being classified as held to be sold will be measured at the lower amount of fair value less the costs to sell and depreciation to cease.
Assets that meet the criteria for being classified as held for selling must be presented separately within the statement financial position. The results of discontinued operations must be separately presented in the statement comprehensive income.
Scope
This IFRS applies to all non-current assets1 that are recognized and all disposal groups within an entity. This IFRS applies to all non-current assets and disposal categories (as per paragraph 4), with the exception of those assets listed at paragraph 5, which will continue to be measured according to the Standard.
Non-current assets that are classified in accordance to IAS 1 Presentations of Financial Statements will not be reclassified into current assets until they meet this IFRS criteria. Assets belonging to a class that an entity would ordinarily consider non-current and that were acquired solely with the intention of resale will not be considered current unless they meet this IFRS.
Classification
Non-current assets must be considered held for sale if the majority of their carrying amount can be recovered through future cash flows. IFRS 5, which is not applicable to non-current assets that are going to be abandoned, will not be applied as the carrying value of an abandoned asset can be recovered through future uses.
An asset must be immediately available for sale to be classified as being held for sale. The sale must also be highly probable. IFRS 5 outlines the criteria for a sale that is highly probable.
- The management must agree to a plan for selling the asset.
- It is essential to start an active search for a buyer.
- It must be actively promoted for sale at a reasonable price relative to its current fair market value.
- The sale must be completed within a year of the date of classification.
- It is unlikely that significant changes will be made to this plan.
Measurement
Before the asset is considered held for sale, it must be measured according to its applicable IFRS. After it is classified as being held for sale, it should be measured at its fair value less the costs of selling. IFRS 5 does not list any exceptions to this rule.
- Deferred tax assets
- Assets based on employee benefits – according IAS 19, Employee Benefits.
- Financial assets falling under the sphere of IFRS9 Financial Instruments
- Non-current assets are included in the IAS 40 Investment Property Fair Value Model.
- Non-current assets are those that have a fair value and less than the cost to sell, in accordance IAS 41 Agriculture
- Contractual rights under insurance contracts, as defined by IFRS 4 Insurance Contracts.
Any of the assets listed above must be measured according to the same accounting policies as before they are sold. These assets are treated the same way, but they need to be presented separately and must be disclosed.
Discontinued Operations
A discontinued operation is an element of an entity that has been disposed or is being held for sale.
- Refers to a distinct major business line or geographic area of operation.
- Part of a disposal plan
- A subsidiary that is acquired with the sole purpose of resale.
IFRS 5 requires that discontinued operations be separately presented in financial statements in order for the reader to be informed about the operations the entity has stopped and the operations it is continuing to generate future profits.
IFRS 5 requires that discontinued operations be presented in the following format:
Statement Of Profit and Loss or Other Comprehensive Income:
- A single amount that includes the sum of:
- The profit or loss after taxes from the discontinued operation
- The post-tax gain/loss based on the measurement of fair value fewer selling costs.
- Gain or loss post-tax on assets sold or disposal groups used in the discontinued operation.
You can find the analysis of the single amount in the notes and on the face of your statement of profit/loss or other comprehensive income.
Statement of Cash Flows:
The net cash flow attributable the investing, financing and operating activities of the discontinued operations Statement of financial position must include non-current assets and other assets. Same applies to liabilities of disposal groups that are held for sale.
