When a company (or another entity) plans to sell an asset and / or plans to close some part of business, then it might affect its financial position
Therefore, the stakeholders of entity, mainly investors, need to be informed about these events.
Ind AS 105 Non-Current Assets Held for Sale and Discontinued Operations is issued to highlight the results of discontinued operations and to separate them from the results of ongoing activities.
The only exception is when a company regularly buys and sells assets normally considered as non-current. These cases are dealt with under Ind AS 16 Para 68A which says
'However, an entity that, in the course of its ordinary activities, routinely sells items of property, plant and equipment that it has held for rental to others shall transfer such assets to inventories at their carrying amount when they cease to be rented and become held for sale. The proceeds from the sale of such assets shall be recognised as revenue in accordance with Ind AS 115, Revenue from Contracts with Customers. Ind AS 105 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories'
Objective of Ind AS 105
Ind AS 105 focuses on 2 main areas:
1. It specifies the accounting treatment for assets (or disposal groups) held for sale, and
2. It sets the presentation and disclosure requirements for discontinued operations.
Exception to the rule as per para 5 of Ind AS 105 applies to
(a) deferred tax assets (Ind AS 12, Income Taxes).
(b) assets arising from employee benefits (Ind AS 19, Employee Benefits).
(c) financial assets within the scope of Ind AS 109, Financial Instruments.
(e) non-current assets that are measured at fair value less costs to sell in accordance with Ind AS 41, Agriculture.
(d) contractual rights under insurance contracts as defined in Ind AS 104, Insurance Contracts.
When to classify an asset as held for sale
You should classify a non-current asset as held for sale if its carrying amount will be recovered principally through a sale rather than continuing use.
The same applies for a disposal group.
Disposal group as defined in Appendix A of Ind AS 105 is a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated in accordance with the requirements of paragraphs 80–87 of Ind AS 36, Impairment of Assets, or if it is an operation within such a cash generating unit.'
For example, when a company runs a few divisions and decides to sell one division, then all assets (including PPE, inventories, deferred tax, etc.) and all liabilities of that division would represent a disposal group.
Abandon an asset
Para 13 specifies 'An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned. This is because its carrying amount will be recovered principally through continuing use. However, if the disposal group to be abandoned meets the criteria in paragraph 32(a)–(c), the entity shall present the results and cash flows of the disposal group as discontinued operations in accordance with paragraphs 33 and 34 at the date on which it ceases to be used. Non-current assets (or disposal groups) to be abandoned include non-current assets (or disposal groups) that are to be used to the end of their economic life and non-current assets (or disposal groups) that are to be closed rather than sold.'
Auditor needs to understand that they shall NOT classify a non-current asset as held for sale in the case when they plan to stop using it, or abandon it because, company will recover its carrying amount through asset's continuing use and not sale i.e. company will NOT apply “held-for-sale accounting”, and will NOT keep an asset at lower of fair value less costs to sell and its carrying amount (specified below).
When will an asset be recovered through a sale?
As per para 7, the asset or disposal group must be available for immediate sale in its present conditions and the sale must be highly probable.
Ind AS 105 sets a few criteria for the sale to be highly probable:
• Management must be committed to a plan to sell the asset;
• An active program to find a buyer must have been initiated;
• The asset must be actively marketed for sale at a price reasonable to its current fair value;
• The sale is expected to be completed within 1 year from the date of classification;
• Significant changes to the plan are unlikely.
How to account for assets held for sale
All assets not excluded from accounting under Ind AS 105 must be measured at lower of their carrying amount and fair value less costs to sell.
Measurement after classification
Immediately before you classify an asset as held for sale, you should measure it under applicable Ind AS. For example, you would measure an item of property, plant and equipment under Ind AS 16.
Subsequently, after you classified an asset as held for sale, you should measure it at lower of its carrying amount and fair value less costs to sell.
With regard to any impairment, immediately before classification as held for sale, the impairment is recognized in line with the applicable Ind AS, for example, under Ind AS 36 for property, plant and equipment. Recognize any impairment loss in profit or loss (sometimes also in other comprehensive income when you apply revaluation model for your property, plant and equipment)
Ones classified as held for sale, company would recognize any impairment loss in profit or loss only.
Appendix A of Ind AS 105 specifies 'A component of an entity that either has been disposed of or is classified as held for sale and:
(a) represents a separate major line of business or geographical area of operations,
(b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or
(c) is a subsidiary acquired exclusively with a view to resale.'
How to present discontinued operations
One should present discontinued operations separately from other continuing operations in financial statements.
Thus, the investors will be able to see what company plans to sell and what part of business it keeps in order to generate future profits and cash flows.
1. In the statement of Profit or loss: A single amount comprising the total of:
o The post-tax profit or loss of discontinued operations, and
o The post tax gain or loss recognized on the measurement to fair value less costs to sell a or on the disposal of assets or disposal groups.
The analysis of a single amount shall be reported in the notes or in the statement of Profit or loss.
2. In the statement of cash flows: the net cash flows attributable to the operating, investing and financing activities of discontinued operations. One can present these disclosures in the notes or in the financial statements themselves.
3. In the Balance sheet: One shall present a non-current asset or assets of a disposal group classified as held for sale separately from other assets. The same applies for liabilities of a disposal group classified as held for sale.
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