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Introduction to IFRS 5

When Assets Are Put Up for Sale

Companies own a lot of things that they use for a long time, like buildings, machinery, and vehicles. These are called non-current assets. But what happens when a company decides it no longer needs one of these assets and plans to sell it instead? This is where International Financial Reporting Standard 5 (IFRS 5) comes in.

IFRS 5, titled 'Non-current Assets Held for Sale and Discontinued Operations,' sets out the rules for how to account for these assets. The main goal is to ensure that a company's financial statements accurately reflect the value of assets that are about to be sold, and to separate the financial results of major business lines that are being shut down or sold off.

Non-current Asset Held for Sale

noun

A non-current asset (or a group of assets) whose value will be recovered primarily through a sale transaction rather than through its continued use in the business.

For an asset to be classified as 'held for sale', it must meet some specific conditions. It’s not enough for a manager to simply say they want to sell something. The decision must be concrete and the sale must be highly probable.

Here are the key criteria:

  1. The asset must be available for immediate sale in its present condition.
  2. Management must be committed to a plan to sell the asset.
  3. There must be an active program to locate a buyer.
  4. The sale is expected to be completed within one year from the date of classification.
  5. The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
  6. Actions required to complete the plan indicate that it's unlikely that the plan will be significantly changed or withdrawn.

Only when all these conditions are met can the company reclassify the asset from its regular category (like 'Property, Plant, and Equipment') to 'Assets Held for Sale'.

Think of it like deciding to sell your house. You don't just think about it; you hire a real estate agent, list it at a fair price, and make it available for viewings. You're committed to selling, and the sale is likely to happen soon. IFRS 5 applies a similar logic to company assets.

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Discontinued Operations

IFRS 5 also covers a bigger-picture scenario: when a company decides to get rid of an entire part of its business. This is known as a 'discontinued operation'. Reporting these separately is important because it helps investors understand the performance of the core, ongoing parts of the business without being distorted by the results of a segment that's being shut down or sold.

Discontinued Operation

noun

A component of an entity that has either been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operations.

For example, if a car manufacturer decides to sell off its entire motorcycle division to focus solely on cars, that motorcycle division would be classified as a discontinued operation. Its profits, losses, and cash flows would be reported separately from the continuing car business.

What IFRS 5 Covers

The standard applies to all recognized non-current assets and disposal groups. A disposal group is a collection of assets to be disposed of, by sale or otherwise, together as a group in a single transaction. However, IFRS 5 does not apply to certain assets, such as deferred tax assets, financial assets within the scope of IFRS 9, or assets arising from employee benefits. Those are handled by other specific standards.