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Chapter 3: Sale and leaseback transaction – classification as held for sale
Entity L enters into an agreement with Entity M to transfer an item of property, plant and equipment to Entity M and to lease that asset back. The details of the arrangement are such that the transfer from Entity L to Entity M will be accounted for as a sale of the asset in accordance with IFRS 15. The transfer is expected to be completed within three months.
Entity L has adopted IFRS 16.
Assuming that the conditions of IFRS 5:7 are met, prior to the transfer the property, plant and equipment should be classified as held for sale.
This conclusion applies irrespective of the proportion of the previous carrying amount of the underlying asset that is recognised as a right-of-use asset under IFRS 16. This is because, upon sale, the asset is entirely derecognised and a new asset (the right-of-use asset) is recognised.
Sale required to be highly probable
IFRS 5 defines ‘highly probable’ as meaning “significantly more likely than probable”, where ‘probable’ means “more likely than not”.
Highly probable – specific conditions
A number of specific conditions must be satisfied for the sale of a non-current asset (or disposal group) to qualify as highly probable:
- the appropriate level of management must be committed to a plan to sell the asset (or disposal group);
- an active programme to locate a buyer and complete the plan must have been initiated;
- the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value; and
except as discussed, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
IFRS 5 is clear that a sale must be expected within one year from the date of classification, so it will not necessarily be sufficient to anticipate that the asset will be sold in the next accounting period. For example, for an entity to conclude that an asset meets the held for sale criteria in March 20X0, it must be expected that it will be sold by March 20X1, irrespective of the date of the entity’s financial year end.
Comparative information
Comparative amounts not restated on classification as held for sale
The separate presentation of non-current assets and disposal groups in the statement of financial position under IFRS 5 is not applied retrospectively. Assets held for sale are presented as such if they meet IFRS 5’s conditions at the end of the reporting period; comparative amounts are not restated. For example, if an asset qualifies as held for sale during 20X2, it should be classified as such in the statement of financial position at the end of 20X2, but not in the 20X1 comparative amounts.
This differs from IFRS 5’s requirements regarding the presentation of discontinued operations in the statement of comprehensive income; IFRS 5’s requirements regarding the presentation of discontinued operations do require reclassification of the results of those operations for comparative periods. Thus, if an operation qualifies as discontinued during 20X2, it should be classified as discontinued in the statement of comprehensive income for the whole of 20X2 and also in the 20X1 comparative information.
Balance sheet information is neither restated nor remeasured for discontinued operations (in common with other disposal groups and noncurrent assets held for sale). Although balance sheet information should not be restated for discontinued operations, the income statement information must be restated. The discontinued operations presented in the income statement in the comparative period should, therefore, be in respect of all operations that have been discontinued by the balance sheet date of the most recent period presented.
The income statement for the comparative period should show as discontinued operations both those reported as discontinued in the previous period, together with those classified as discontinued in the current period. Consequently, the restated prior year income statement figures for a discontinued operation will not necessarily be entirely comparable to the current year’s figure.
The single line item in the income statement for discontinued operations, required by IFRS 5, comprises two elements:
· the post-tax profit or loss of the discontinued operation; and
· the post-tax profit or loss recognised on measurement to fair value less costs to sell.
All remeasurement under IFRS 5 only occurs in the period in which an operation is classified as discontinued. If, however, an impairment loss was recorded in the prior year in relation to the operation, in addition to the normal trading result, this should be included in the discontinued profit or loss for the comparative period, together with the normal trading result.
The requirements in relation to current and prior years are summarised in the following example.
Example – Comparative information
Entity G prepares financial statements for the years to 31 December 20X2 and 20X3. At 31 December 20X2, operation H meets the conditions to be classified as discontinued under IFRS 5. Operation H is sold during the 20X3 accounting period. During the 20X3 financial year, operation J meets the criteria to be classified as held for sale and qualifies as discontinued.
The following table describes the requirements of IFRS 5 for discontinued operations as they affect the current and prior year financial statements.
Income statement Balance sheet 20X2 financial statements 20X2 figures Operation H Presented under IFRS 5. Classified under IFRS 5. Operation J Usual standards. Usual standards. 20X1 comparatives Operation H Comparatives are re-presented. Usual standards. No reclassification. Operation J Usual standards. Usual standards. 20X3 financial statements 20X3 figures Operation H Presented under IFRS 5. Not applicable – assets and liabilities disposed of. Operation J Presented under IFRS 5. Classified under IFRS 5. 20X2 comparatives Operation H Presented under IFRS 5 (that is, presentation that was used in 20X2 financial statements is retained in comparatives to 20X3 financial statements). Classified under IFRS 5. Operation J
Comparatives are re-presented. Usual standards. No reclassification.
Distinguishing costs between continuing and discontinued operations
Revenue and expenses should only be allocated to discontinued operations if the entity will no longer be entitled to that revenue, or it will no longer incur the expense once the operation has been disposed of. The same principle applies to assets and liabilities, but this principle is more clearly stated in IFRS 5: the amounts that are classified as discontinued are the assets to be sold and the related liabilities that are to be transferred.
Allocation of expenses commonly occurs in respect of central overheads. For example, a group’s parent might allocate its head office overheads to all of its subsidiaries on a pro rata basis. If an operation is disposed of, the relevant central overheads might not decrease, at least in the short term. All of the central overheads must be allocated to continuing operations in the group’s income statement, because the costs are incurred by the group regardless of the disposal.
A similar issue arises with inter-company sales, between components that qualify as discontinued and those that are continuing.
Costs incurred as a result of disposal
Entity A sells a major line of business. Because of the sale, costs are incurred by entity A that result in an expense, which would have been avoided if the disposal had not taken place, as follows:
1. Entity A has an agreement with a supplier to take a minimum order of PCs over a period of three years. As a result of the contemplated disposal, the entity will not need the minimum order quantity and will have to pay a measurable penalty. The buyer will use an alternative PC supplier and will not take on the contract.
2. Entity A hired a top manager for the business now to be sold. The candidate gave up a secure job and did not like the prospect of moving to a potential takeover target. To overcome this, entity A included a clause that, in the event of a change of control, it would compensate the manager.
3. Entity A has a contract with a supplier including a change of control provision. If there is a change of control involving the disposal group, entity A pays a compensatory amount to the supplier. This obligation is settled by entity A, and the buyer is never a party to the arrangement.
In all of these situations, the cost is the responsibility of entity A and the liability does not transfer to the buyer. However, because these costs are related to the discontinued operation, they should be presented as such.
Despite being required to be presented within discontinued operations, these costs are not directly attributable to the disposal itself. As a result, they would not be considered ‘costs to sell’, to be included in the ‘fair value less costs to sell’ measure. The costs would be provided for when the criteria in IAS 37 are met, as opposed to when the criteria for classification as held for sale under IFRS 5 are met.
Tax allocation in discontinued operations
An entity should disclose the income tax expense in relation to the profit or loss from the discontinued operation. However, the tax position of the continuing operations might have an impact on the tax position of the discontinued operation, or vice versa. For example, the profit from an entity’s continuing operations might be offset by the loss of a discontinued operation of the same legal entity, so that the entity has a lower tax obligation. The standard is not prescriptive as to how the effect of any such impact should be allocated. The entity has a choice of whether or not to allocate a tax charge to the continuing operations and a tax benefit to the discontinued operation. The entity should select an accounting policy and apply it consistently.
Deferred taxes might also need to be recognised for the difference between the carrying amount of the net assets of a subsidiary that is classified as a discontinued operation and the tax base of the investment (that is, outside basis difference). This is because the exemption for deferred tax on investments in subsidiaries, set out in IAS 12, no longer applies due to the decision to dispose of the investment. The related deferred tax charge or benefit is normally allocated to the discontinued operation in the income statement, because the deferred tax relates to changes in the discontinued operation’s net assets (For example, profits in previous periods).
The same principles apply to the consolidated balance sheet. The single line items for assets and liabilities of the operation should be presented on the face of the balance sheet after elimination of inter-company balances. If the analysis required by IFRS 5 is given on the face of the income statement, it should be presented in a separate section identified as relating to discontinued operations.
One potential method of presentation is illustrated as follows:
Example – Presentation for discontinued operations
Revenue x Finance costs x Share of profit of associates accounted for using the equity method x x Tax expense x x Discontinued operations
Revenue 1,5001 Expenses (1,650)1 Loss before tax (150)1 Loss on remeasurement or disposal (45)2 (195) Tax on profit 503 Tax on remeasurement or disposal 154 655 Loss on discontinued operations (130)6 Profit for the financial year x In relation to the discontinued operation:
1 is required by IFRS 5;
2 is required by IFRS 5;
3 is required by IFRS 5;
4 is required by IFRS 5;
5 is the total tax expense in respect of discontinued operations; and
6 is the total amount disclosed, as required by IFRS 5.
Entities might comply with the disclosure requirements for cash flow statements in the following ways:
- No presentation of cash flows from discontinued operations on the face of the cash flow statement (that is, gross cash flows are presented), with a breakdown between the three categories presented in the notes.
- Cash flows from discontinued operations are split between the three relevant categories on the face of the cash flow statement, with one line being included within each category including the relevant results from the discontinued operation. A total is presented for each category.
- Information is presented separately for continuing and discontinued operations, on a line-by-line basis, on the face of the cash flow statement. A total is presented for each category.
Presentation of cash flows in discontinued operations
There are different ways of presenting the information in the cash flow statement that meet the requirements of IFRS 5. The underlying principle is that the cash flow statement must give the cash flows for the total entity, including both continuing and discontinued operations, with additional information in relation to the discontinued operations either on the face of the cash flow statement or in the notes.
Option 1 – Cash flow statement shows total cash flows
If this presentation is given, each item in the cash flow statement should include the cash flows from both continuing and discontinued operations (For example, the figure for interest received would be the aggregate of both continuing and discontinued operations). The reconciliation of profit to cash generated from operations should include both the profit from continuing operations and discontinued operations, in order to reconcile to amounts appearing on the income statement. Separate disclosure should be given of the cash flows attributable to each of operating, investing and financing activities of discontinued operations, either on the face of the cash flow statement or in the notes.
If the discontinued operation is held for sale at the balance sheet date, a reconciliation should be given of the change in cash, at the foot of the cash flow statement, to the movement in cash and cash equivalents on the balance sheet.
If this presentation is given, only the cash flows from continuing operations should be shown on the face of the cash flow statement (For example, the figure for interest received would relate to continuing activities only). The cash flows from operating activities from discontinued operations should be included as a separate line within total cash flows from operating activities.
Example 1 – Cash flow presentation
Extract of cash flow statement for the year ended 31 December 20X6
Cash and equivalents at 31 December 20X6 X Included in cash and cash equivalents per the balance sheet X Included in the assets of the disposal group X Option 2 – Cash flows from discontinued operations split between continuing and discontinued operations on the face of the cash flow statement
If this presentation is given, only the cash flows from continuing operations should be shown on the face of the cash flow statement (For example, the figure for interest received would relate to continuing activities only). The cash flows from operating activities from discontinued operations should be included as a separate line within total cash flows from operating activities.
Example 2 – Cash flow presentation
Extract of cash flow statement for the year ended 31 December 20X6
Cash flows from operating activities X Cash generated from operations (continuing activities) X Interest received (continuing activities) X Interest paid (continuing activities) X Tax paid (continuing activities) X Cash flows from operating activities (discontinued operations) X Total cash flows from operating activities X The cash flows from financing and investing activities should be disclosed in a similar manner. The reconciliation of profit to cash generated from operations would need to include only the profit from continuing operations. However, in our view it would be good practice to give the same reconciliation for discontinued operations in order to reconcile to amounts appearing on the face of the income statement. If the discontinued operation is held for sale at the balance sheet date, a reconciliation should be given of the change in cash, at the foot of the cash flow statement, to the movement in cash and cash equivalents on the balance sheet (as shown in example 1).
If the entity presents two statements, being an income statement and a statement of other comprehensive income, a separate section relating to discontinued operations should be presented in each.
It might take some time for all aspects of the disposal of a discontinued operation to be completed. There might be, For example, contingent consideration receivable or indemnities given to the purchaser. A best estimate is made of the sales consideration for the transaction at the date of disposal, where any consideration is deferred or contingent. Amounts arising from resolution of uncertainties, or any change in estimated consideration, are classified as part of discontinued operations in the income statement of the period in which they occur. They are separately disclosed and described.
The seller might have retained some liabilities directly related to the operation that is discontinued, such as environmental and product warranty obligations. The resolution of these is reported as part of discontinued operations.
Assets and liabilities of a group pension scheme attributable to a discontinued operation might be subsequently transferred to the purchaser. This might require an actuarial valuation to determine the appropriate allocation. Any adjustments arising from the valuation might affect the amount previously attributed to the discontinued operation on disposal. This affects the gain or loss on disposal.
A discontinued operation might no longer meet the ‘held for sale’ criteria. The results of the discontinued operation are presented in the income statement as continuing in both the period in which it ceases to be classified as held for sale and in any comparative periods presented. The comparatives should be described as ‘re-presented’. The single line-item disclosure is reclassified to the relevant individual line items in the income statement, so that continuing revenue, For example, includes the revenue of the operation that was previously classified as discontinued, or equity-accounted earnings from an interest in an associate.
Decision tree for subsequent balance sheet dates
The following decision tree explains the subsequent assessment of an asset or disposal group held for sale:
Gains or losses relating to continuing operations
Gains or losses on the remeasurement of non-current assets that do not relate to discontinued operations are included in profit or loss from continuing operations. The amount should be separately disclosed, either in the notes or on the face of the income statement. If the amount is disclosed in the notes, it should be indicated which line item in the income statement includes the remeasurement.
Presenting the gain or loss on disposal in continuing operations
Where an operation does not qualify as discontinued, IAS 1 requires separate disclosure (on the face of the income statement or in the notes) of the nature and amount of items of income and expense, if the items are material.
Examples of such items include restructuring costs and provisions and disposals of tangible fixed assets. IAS 1 also requires disclosure (on the face of the income statement) of items that are relevant to an understanding of an entity’s financial performance. This depends on the materiality and the nature and function of the components of income and expense.
The gain or loss on the disposal of a subsidiary that is not a discontinued operation might warrant an additional line item. Even where the item is not sufficiently material to warrant an additional line item on the face of the income statement, the amount would generally be disclosed in the notes to the financial statements.
IFRIC 17 – Distributions of non-cash assets to owners
Scope of IFRIC 17
Non-reciprocal, non-cash distributions to owners, or non-reciprocal distributions to owners with a non-cash settlement option, are accounted for under IFRIC 17. The interpretation does not apply to a distribution of an asset to another entity within the same consolidated group or to exchange transactions between an entity and its owners. Distributions within IFRIC 17’s scope are those made to the owners in their capacity as owners (where all owners are treated equally) in the event of a change in control over the assets distributed. A partial distribution of a subsidiary, where control over the subsidiary is retained by the distributing entity, is not in scope.
An entity should establish an accounting policy for distributions to an entity within the same consolidated group, outside the scope of IFRIC 17.
Distribution of 100% of a business where all shareholders are treated equally
Entity A is owned by public shareholders. No single shareholder (or group of shareholders bound together by a contractual arrangement) controls entity A. Entity A distributes 100% of its interest in its wholly owned subsidiary, entity B, to its shareholders. The transaction is within IFRIC 17’s scope.
Partial distribution of a business where all shareholders are treated equally
Entity C is owned by public shareholders. No single shareholder (or group of shareholders bound together by a contractual arrangement) controls entity C. Entity C distributes some of its interest in its wholly owned subsidiary, entity D, to its shareholders, but it retains a controlling interest in entity D. The transaction is outside IFRIC 17’s scope, because entity D is controlled by entity C before and after the transaction.
Distribution where there is no change in control
Entity E is owned by public shareholders. A group of shareholders, who are bound together by a contractual arrangement, controls entity E, and there are also other non-controlling shareholders. Entity E distributes 100% of its interest in its wholly owned subsidiary, entity F, to its shareholders. The entire transaction – that is, both the distribution to the controlling shareholders and to the other shareholders – is outside IFRIC 17’s scope, because the controlling parties of entity E control entity F before and after the transaction. Interaction between IFRS 5 and IAS 28 – Disposals of associates and joint ventures Associates and joint ventures classified as held for sale
Application of IFRIC 17
The liability to pay a dividend for a non-cash distribution is recognised under IFRIC 17 at the date when the dividend is appropriately authorised and is no longer at the entity’s discretion. This date will differ by jurisdiction. For example, if the jurisdiction requires shareholders’ approval, the liability is not recognised until such approval is granted. Where shareholders’ approval is not required, the dividend payable is normally recognised when declared.
The liability is measured at the fair value of the assets to be distributed.
A distribution that gives a settlement alternative should be measured at fair value, based on the probability of acceptance of the various alternatives.
The distribution liability for net assets that constitute a business is measured at the fair value of the business, rather than the sum of individual fair values of the net assets. The distribution liability is remeasured at fair value at each reporting date until satisfied, with measurement adjustments taken to equity.
A business might be distributed, by a dividend of shares in the relevant subsidiary, to an entity’s owners. If shares in a subsidiary that are quoted in an active market are distributed, their fair value generally should be established by reference to the quoted price. If the subsidiary’s shares are not quoted, their value generally would be determined based on the fair value of the business as a whole using valuation techniques.
Alternative methods of measurement of a liability under IFRIC 17
View 1 – there is a single unit of account – the business as a whole
The distribution is viewed from the distributing entity’s point of view. The liability is measured at the fair value of the business. This fair value includes any control premium related to that business. For example, an entity making a distribution has 50 shareholders who each own an equal number of shares. It makes a distribution of one of its subsidiaries, which has 100 shares. The liability is recognised at the fair value of the subsidiary being distributed as a whole. Thus, the liability recognised by the entity includes a control premium.
View 2 – the number of shares being distributed to each owner is the unit of account
The distributing entity is distributing a non-controlling shareholding to each of its individual owners. Using the same facts as the example in View 1, each shareholder will receive two shares. The total liability is recognised as the sum of the fair values of each distribution of two shares. Each of these individual distributions includes no control premium. Thus, the liability recognised by the entity does not include any control premium.
In practice this should not result in substantially different measurement outcomes.
Any difference between the carrying amount of the dividend payable and the carrying amount of the assets distributed on settlement is recognized in profit or loss.