What is a Disposal group?

A disposal group 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. [Appendix A] A disposal group may be a group of cash-generating units, a single cash-generating unit or part of a cash-generating unit.

If the group includes a cash-generating unit to which goodwill has been allocated under IAS 36, or includes an operation within such a cash-generating unit, the associated goodwill is included within the disposal group.

Applying the definition of a disposal group?

When an asset is being sold individually, IFRS 5 applies only if it is a non-current asset. When a group of assets is being disposed of in a single transaction, the classification and presentation requirements of IFRS 5 apply to the disposal group as a whole.

Therefore, when a business is being sold, IFRS 5 applies to all recognised assets and liabilities of that business, including goodwill. The definition of a disposal group is, however, much wider than this. It requires neither that the disposal involve a ‘business’, nor that the group include any non-current assets. At an extreme, therefore, it is apparently possible for a group of inventories intended to be sold in a single transaction to constitute a disposal group. In practice, it is doubtful whether it would be helpful to users for such items to be removed from inventories and classified separately as assets held for sale. Accordingly, some care and judgement may be necessary when interpreting and applying the definition of a disposal group.

A liability should be included in a disposal group only if it will be transferred with the assets in the transaction. It is possible for some liabilities of a business not to be transferred. For example, an entity may sell the trade and assets of a business but retain warranty obligations relating to past sales. Similarly, an entity may retain borrowings with the intention of repaying them from the proceeds of disposal. In both of these examples, the liabilities to be retained should be excluded from the disposal group.

Disposals and partial disposals

Sale plan involving loss of control of a subsidiary

When an entity is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale, regardless of whether the entity will retain a non-controlling interest in its former subsidiary after the sale.

IFRS 5: Para 8A reflects the Board’s conclusion that loss of control is a significant economic event that changes the nature of an investment. The parent-subsidiary relationship ceases to exist and a significantly different investor-investee relationship begins. The new investor-investee relationship is recognised and measured initially at the date when control is lost.

Disposal of subsidiary with retention of associate interest – example

Entity D, which has a 31 December reporting date, holds a 70 per cent interest in a subsidiary. On 1 July 20X6, Entity D enters into an unconditional, binding agreement to dispose of 30 per cent of its interest. The 30 per cent interest is disposed of in February 20X7, at which point Entity D ceases to have control and instead has significant influence.

The planned disposal of shares results in the subsidiary being classified as a disposal group held for sale that should be accounted for in accordance with IFRS 5 from the date the criteria for classification as held for sale are met.

For the purposes of the 20X6 financial statements, the subsidiary continues to be consolidated (i.e., 100 per cent of the assets and liabilities of the subsidiary are consolidated), but presentation is collapsed into two lines in the statement of financial position (i.e., non-current assets held for sale and associated liabilities). If the disposal group qualifies as a discontinued operation, the presentation in the statement of comprehensive income is collapsed into one single line in accordance with IFRS 5: Para 33.

In 20X7, Entity D consolidates the subsidiary for the first two months of the financial year (classifying amounts as arising from discontinued operations, if appropriate). Following the disposal of shares, Entity D accounts for the disposal of the subsidiary, recognising any gain or loss in profit or loss. The gain or loss arising on the disposal is calculated in accordance with paragraph 25 of IFRS 10. Thereafter, the 40 per cent interest held on an ongoing basis will be accounted for as an associate, i.e., using the equity method.

Dilution of interest in a subsidiary through rights offer – example

Company H has a wholly-owned subsidiary, Company B. Company B makes a rights offer to Company H’s shareholders, proposing to issue 10 of its own shares for each share held in Company H. To receive the rights, the shareholders must pay fair value for the shares issued and accept the offer by a specified deadline.

After the issuance of shares under the rights offer, Company H will hold 35 per cent of Company B. As a result, Company H will relinquish control over Company B but will retain significant influence.

The rights offer is effectively Company H’s disposal of a portion of its interest in Company B to a preferred group of bidders if the rights are taken up. Because the shares will be issued at fair value, Company H will receive proceeds for the sale of 65 per cent of its investment in Company B to its shareholders.

This disposal will change the nature of the investment in Company B from a subsidiary to that of an associate. Accordingly, the entire investment in Company B will be recognised as a disposal group held for sale if the investment is available for sale in its present condition and the sale is regarded as highly probable (i.e. it is highly probable that the rights will be taken up).

Step disposals NCI – non-controlling interest FVOCI – Fair value through OCI financial asset CTA – currency translation allowance

Disposal of a subsidiary in exchange for interest in another subsidiary Entity A has a wholly-owned subsidiary, B. Entity A sells subsidiary B to entity C, a listed entity, for shares in entity C and ends up owning 75% of entity C’s shares (as illustrated in the diagram). The net assets of entity B prior to the disposal are C1m (fair value C1.3m) and goodwill previously capitalised and not impaired is C600,000; the carrying value of entity B in entity A’s books is C1.5m. At the date entity A acquired entity B, entity B’s profit and loss reserve was C400,000 and B has since made C100,000 post acquisition profits. The position prior to the transaction was, therefore, as follows: Consolidation of entities A and B before transaction Entity A Entity B Elim Consol C’000 C’000 C’000 C’000 Goodwill − − 600 600 − − 600 600 Investment in subsidiary 1,500 − (1,500) − Net assets 10,000 1,000 − 11,000 Total assets 11,500 1,000 (900) 11,600 Share capital 2,000 500 (500) 2,000 Retained earnings 9,500 100 − 9,600 – pre acquisition reserves − 400 (400) − Total equity 11,500 1,000 (900) 11,600 The net assets of entity C prior to its acquisition of entity B are C380,000 (fair value C500,000). Entity C then issues shares worth C1.75m (which is the fair value of the consideration given for the acquisition of 100% of B), being C600,000 nominal value and C1.15m premium. The balance sheets of the three companies directly after the issue of shares by entity C are as follows: Summarised balance sheets Co A Co B Co C C’000 C’000 C’000 Investment in subsidiary 1,750 − 1,750 Net assets 10,000 1,000 380 11,750 1,000 2,130 Share capital 2,000 500 800 Additional paid in capital − − 1,150 Retained earnings 9,750 500 180 Total equity 11,750 1,000 2,130 The parent, entity A, had an interest in entity B that cost C1.5m, and has in effect swapped this for an interest in entity C’s group. In its separate financial statements, entity A states its investment in entity C group at the fair value of the consideration given, C1.75m. With regard to entity A’s consolidated financial statements, it is necessary to calculate the ‘gain or loss’ (on the disposal of 25% of entity B) that is recognised in equity and the goodwill arising (on the acquisition of entity C). When control is retained, it should be noted that goodwill attributed to the portion sold remains unchanged and is allocated to the non-controlling interest. In addition, if control is retained, the gain or loss should be recognised in equity. Gain or loss on disposal of 25% of entity B C’000 Calculation of non-controlling interest entity B in A’s consolidated financial statement: Book value of assets and liabilities given up plus attributable goodwill ((C1m + C600,000) × 25%) 400.0 Fair value of business received in consideration (C1.75m × 25%) (note 1) 437.5 Gain on disposal recognised in equity 37.5 The net assets compared should include an appropriate portion of any cumulative exchange differences and any reserve on FVOCI debt investments previously recognised in other comprehensive income and accumulated in equity. Goodwill on acquisition of 75% of entity C C’000 Fair value of business given in consideration (note 2) (C1,750,000 × 25%) 437.5 Non-controlling interest entity C measured at the proportionate share of the acquired net asset (CU 500,000 × 25%) (note 2) 125.0 Less: Fair value of assets and liabilities acquired 500.0 Goodwill 62.5 Note 1: Entity A receives consideration (that is, shares in entity C) with a fair value of C1.75m. However, the amount included in the calculation is the amount attributable to the interest in entity B that has been disposed of, that is 25% of C1.75m. The fair value of the part of the subsidiary B that is effectively disposed of is derived from the price paid by entity C for the whole of entity B, which is C1.75m. Note 2: This example assumes that the non-controlling interest is determined with reference to the proportionate share of the acquired entity C’s net identifiable assets. In accordance with IFRS 3, the non-controlling interest could also be measured at fair value, in which case the amount of goodwill will differ. The consolidated entry recognised is: C’000 C’000 Dr Fair value of net assets – entity C 500.0 Dr Goodwill – entity C 62.5 Cr Non-controlling interest – entity B 400.0 (1,600 × 25%) Cr Non-controlling interest – entity C 125.0 (500 × 25%) Cr Equity C37.5 Consolidation of entities A, B and C after the transaction (note: entity C’s net assets are adjusted to fair value for the purpose of the consolidation as entity A has acquired 75% of entity C and gained control of entity C). Consolidation of entities A, B and C after the transaction Co A Co B Co C Elim Consol Notes C’000 C’000 C’000 C’000 C’000 C’000 Goodwill − − − 662.5 662.5 5 Investment in subsidiary 1,750.0 − 1,750.0 (3,500.0) − Net assets 10,000.0 1,000.0 380.0 120.0 11,500.0 6 11,750.0 1,000.0 2,130.0 (2,717.5) 12,162.5 Equity share capital 2,000.0 500.0 800.0 (1,300.0) 2,000.0 Additional paid in capital − − 1,150.0 (1,150.0) − Retained earnings 9,750.0 500.0 180.0 (792.5) 9,637.5 7 Non-controlling interest − − − 525.0 525.0 8 Total equity 11,750.0 1,000.0 2,130.0 (2,717.5) 12,162.5 Note 3: The goodwill balance of C662,500 represents the previous balance of the goodwill of C600,000 arising on the acquisition of entity B, plus the goodwill of C62,500 arising on the acquisition of entity C. The original goodwill arising on the acquisition of entity B is retained and a portion (25%) is allocated to the non-controlling interest. Note 4: On consolidation the net assets of entity C are increased from C380,000 to their fair value of C500,000. Note 5: The consolidated retained earnings represent the retained earnings of entity A (C9,500,000 excluding the investment revaluation gain of C250,000, which is reversed) plus the post-acquisition profits of entity B of C100,000, plus the gain on disposal of C37,500 which is recognised directly in equity. Note 6: The non-controlling interest represents 25% of entity C’s net assets of C500,000 at fair value, being C125,000, plus 25% of entity B’s net assets (including goodwill – as explained in note 5) of C1,600,000, being C400,000, resulting in C525,000 in total. One complication that could arise in this situation is if entity C were required to prepare consolidated financial statements. In that case entity C would have applied IFRS 3 to the business combination. It is possible that the transaction could be classified as a reverse acquisition of entity C by entity B, if it is determined that entity B controls entity C in accordance with the principles of IFRS 10. The accounting by entity C for the business combination in the consolidated financial statements of entity C is not dealt with further here.

When calculating the gain or loss on disposal, an appropriate portion of any cumulative exchange differences previously recognised in other comprehensive income and accumulated in equity is included in the calculation of the net assets. Similarly, an appropriate portion of a debt instrument´s FVOCI-reserve should also be reclassified to profit and loss and included in the calculation of the net assets. However, an appropriate portion of any revaluation reserve previously recognised in other comprehensive income in accordance with IAS 16 that has arisen on the subsidiary’s consolidation would not be recycled in this way, but would instead be transferred to reserves within equity.

Further financial impacts on loss of control As a result of an entity ceasing to be a subsidiary, there might be further financial impacts that need to be recognised (For example, provisions for guarantees). Such gains or losses are not directly part of the profit or loss on the disposal, but, where they need to be provided for, they should be included as part of the profit or loss on disposal. If they are not provided for, on application of the appropriate accounting standards, they might need to be disclosed to show the full effect of the cessation.

Treatment of an available-for-sale reserve according to IAS 39 When calculating the gain or loss on disposal, an appropriate portion of a debt instrument´s FVOCI-reserve should be reclassified to profit and loss and included in the calculation of the net assets.

Disposal groups that do not include any scoped-in non-current assets

Some entities, such as financial institutions, may identify disposal groups that do not contain any IFRS 5 scoped-in non-current assets. For example, consider Entity A (a bank) that is about to finalise the disposal of 100 per cent of its subsidiary, Entity B, which is a legal entity and which meets the definition of a business under IFRS 3. Entity B is a disposal group but does not contain any IFRS 5 scoped-in non-current assets. The business is made up of current and non-current financial assets and liabilities only (all of the support for the activities, which are of a financial nature, has been outsourced).

The disposal group is being sold at a loss (i.e. the proceeds of disposal are lower than the net of the carrying amounts of the individual assets and liabilities under IFRS 9 or, for entities that have not yet adopted IFRS 9, under IAS 39).

The question arises as to whether the disposal group is subject to the measurement principles of IFRS 5, given that it does not contain any IFRS 5 scoped-in non-current assets. The Standard does not provide clear guidance in this regard.

The relevant requirements in the Standard are as follows.

IFRS 5:2 states that “the measurement requirements of this IFRS apply to all recognised non-current assets and disposal groups, except for those assets listed in IFRS 5 which shall continue to be measured in accordance with the Standard noted”.

IFRS 5:4 states that “if a non-current asset within the scope of the measurement requirements of this IFRS is part of a disposal group, the measurement requirements of this IFRS apply to the group as a whole”.

It is not clear whether a disposal group that contains no IFRS 5 scoped-in non-current assets is subject to the measurement principles of IFRS 5. In particular, it is not clear whether the bracketed reference from IFRS 5:2 to IFRS 5:4 is intended to limit the measurement requirements to those disposal groups described in IFRS 5:4.

One could read IFRS 5 to indicate that if a disposal group does not contain any IFRS 5 scoped-in non-current assets, the measurement principles in IFRS 5 do not apply to the disposal group. If this view is taken, the financial assets and liabilities of Entity B will be measured in accordance with IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39) and the loss on disposal will be recognised only when those assets and liabilities are disposed of.

Equally, one could take the view that the measurement requirements of IFRS 5 may be applied even if a disposal group contains no scoped-in non-current assets, on the basis of the following arguments:

the Standard does not state explicitly that its measurement principles should not be applied to such a disposal group; and

it is most relevant to measure any disposal group at the amount that will ultimately be realised upon disposal.

This view is also consistent with one of the underlying principles of IFRS 5 – i.e The relevant requirements in the Standard are as follows.

IFRS 5 states that “the measurement requirements of this IFRS apply to all recognised non-current assets and disposal groups (as set out in IFRS 5), except for those assets listed in which shall continue to be measured in accordance with the Standard noted”.

IFRS 5 states that “if a non-current asset within the scope of the measurement requirements of this IFRS is part of a disposal group, the measurement requirements of this IFRS apply to the group as a whole”.

It is not clear whether a disposal group that contains no IFRS 5 scoped-in non-current assets is subject to the measurement principles of IFRS 5. In particular, it is not clear whether the bracketed reference from IFRS 5:2 to IFRS 5:4 is intended to limit the measurement requirements to those disposal groups described in IFRS 5:4.

One could read IFRS 5:2 and 4 to indicate that if a disposal group does not contain any IFRS 5 scoped-in non-current assets, the measurement principles in IFRS 5 do not apply to the disposal group. If this view is taken, the financial assets and liabilities of Entity B will be measured in accordance with IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39) and the loss on disposal will be recognised only when those assets and liabilities are disposed of.

Equally, one could take the view that the measurement requirements of IFRS 5 may be applied even if a disposal group contains no scoped-in non-current assets, on the basis of the following arguments:

the Standard does not state explicitly that its measurement principles should not be applied to such a disposal group; and

it is most relevant to measure any disposal group at the amount that will ultimately be realised upon disposal.

This view is also consistent with one of the underlying principles of IFRS 5 – i.e., that losses on disposals of businesses should be recognised when the IFRS 5 criteria for qualification as held for sale are met. If this latter view is taken, the disposal group will be remeasured in accordance with IFRS 5 when the held for sale criteria are met.

In the absence of clear guidance in the Standard, one of the two approaches described above should be applied consistently as an accounting policy choice.

This issue has been discussed by the IFRS Interpretations Committee; the January 2016 IFRIC Update included the question as to whether the measurement requirements of IFRS 5 apply to a disposal group that consists mainly, or entirely, of financial instruments as one of a lists of IFRS 5 issues discussed by the Committee but upon which the Committee did not reach a conclusion. that losses on disposals of businesses should be recognised when the IFRS 5 criteria for qualification as held for sale are met. If this latter view is taken, the disposal group will be remeasured in accordance with IFRS 5 when the held for sale criteria are met.

In the absence of clear guidance in the Standard, one of the two approaches described above should be applied consistently as an accounting policy choice.

The allocation of impairment losses that exceed the carrying amount of scoped-in non-current assets.

This issue has been discussed by the IFRS Interpretations Committee; the January 2016 IFRIC Update included the question as to whether the measurement requirements of IFRS 5 apply to a disposal group that consists mainly, or entirely, of financial instruments as one of a list of IFRS 5 issues discussed by the Committee but upon which the Committee did not reach a conclusion.

Disposal by means of an initial public offering requiring regulatory approval

Entity A plans to dispose of its Subsidiary X (a disposal group) by means of an initial public offering (IPO). The planned IPO has been approved by the board of directors. For an IPO to occur in Entity A’s jurisdiction, the local securities regulator must approve a prospectus; at the reporting date, regulatory approval for the prospectus has not been received.

The detailed criteria for qualification as held for sale, set out in IFRS 5:7 to 9, require that the asset (or disposal group) must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets (or disposal groups), and its sale must be highly probable. Entity A will need to ensure that all of these criteria are met.

In particular, in relation to the requirement for regulatory approval of the IPO (assumed to be ‘usual and customary’ in Entity A’s jurisdiction), Entity A’s assessment as to whether the disposal is ‘highly probable’ will require consideration of the following (not an exhaustive list):

• whether, in general, the IPO regulatory process in Entity A’s jurisdiction is such that there is more than a remote likelihood of regulatory approval either being denied or delayed (such that the IPO will not be completed successfully within one year, other than in circumstances permitted under IFRS 5:9). This assessment would take into account the historical experience of entities undergoing the same process;
• whether the progress of Entity A’s application for approval is following the normal course in Entity A’s jurisdiction or whether the progress made to date indicates that there are any issues or concerns that may result in denial or delay of the application; and
• whether there is any indication or experience in the market suggesting that Subsidiary X’s nature (e.g., participation in regulated/politically sensitive sector, significant size) will result in Entity A’s application being subject to additional scrutiny.

Entity A will also need to have regard to whether the IPO requires shareholder approval.

Events are expected to delay the sale at the date of initial classification If it is known, at the time of classification as held for sale, that there are likely to be conditions that will extend the period until sale beyond one year, the cause of the extension beyond one year must be by someone who is neither the seller nor the expected buyer. If the cause is the seller’s, the asset will not be classified as held for sale in the first place, because it is not available for sale in its present condition. An example of a buyer-seller imposed condition that would fail the test is an agreement that a contract will be agreed at some time in the future (that is, an agreement is entered into to sell in two years’ time). The asset has not been sold within a year, and it is correct that it is not classified as held for sale. In addition to the conditions being imposed by someone who is not the buyer, the actions that are needed to respond to the conditions are unable to begin until after a firm purchase commitment is obtained. A firm purchase commitment is defined in Appendix A to IFRS 5 as being a legally enforceable agreement between two unrelated parties that specifies all significant terms, including the price and timing of the transactions, and includes a disincentive for non-performance that is sufficiently large to make performance highly probable. This condition has been included because, if an entity could do something about the condition when the asset or disposal group is to be put up for sale, the asset or disposal group is not available for sale in its current condition. However, if the asset or disposal group is available for sale immediately in its current condition, except for a contingent event that can only be resolved when a sale agreement is entered into, it would be unfair to prevent entities from classifying such assets or disposal groups as held for sale.

Regulatory approval required for sale An entity in the power-generating industry is committed to a plan to sell a disposal group that represents a significant portion of its regulated operations. The sale requires regulatory approval, which could extend the period required to complete the sale beyond one year. Actions necessary to obtain that approval cannot be initiated until after a buyer is known and a firm purchase commitment is obtained. However, a firm purchase commitment is highly probable within one year. In that situation, the conditions in IFRS 5, for an exception to the one-year requirement in the standard, are met. In this situation, at the time of initial classification, the entity expected to meet all of the conditions set out in IFRS 5; however, when a firm purchase agreement is entered into within a year of classification as held for sale, the buyer or another party imposes conditions. The entity can retain the original classification, provided that it has taken action to respond to the conditions and it expects that it will be able to meet them and the sale will be successful.

Environmental damage identified after sale agreement entered into An entity is committed to a plan to sell a manufacturing facility in its present condition, and it classifies the facility as held for sale at that date. After a firm purchase commitment is obtained, the buyer’s inspection of the property identifies environmental damage that was not previously known to exist. The entity is required by the buyer to make good the damage, which will extend beyond one year the period required to complete the sale. The entity has initiated actions to make good the damage, and satisfactory rectification of the damage is highly probable. In that situation, the conditions in IFRS 5, for an exception to the one-year requirement in paragraph 8 of the standard, are met. This example could be contrasted with previous FAQ. In that example, an asset was up for sale and the entity became aware of environmental work that had to be rectified before the asset could be transferred. In that case, the asset could not be classified as held for sale, because it could not be sold in its present condition. The key distinction between this scenario and the one at previous FAQ is that a firm purchase commitment had not been obtained when the environmental damage was discovered. Where the condition is imposed only after a firm commitment has been made to purchase the asset, and the entity meets the extension conditions, the asset can continue to be classified as held for sale.

Externally imposed conditions An entity is committed to a plan to sell a non-current asset, and it classifies the asset as held for sale at that date: a. During the initial one-year period, the market conditions that existed when the asset was initially classified as held for sale deteriorate and, as a result, the asset is not sold by the end of that period. During that period, the entity actively marketed, but did not receive any reasonable offers to purchase, the asset, and so it reduced the price. The asset continues to be actively marketed at a price that is reasonable, given the change in market conditions, and the criteria in IFRS 5 continue to be met. In that situation, the conditions in IFRS 5, for an exception to the one-year requirement in paragraph 8 of the standard, are met. Hence, at the end of the initial one-year period, the asset would continue to be classified as held for sale. b. During the following year, market conditions deteriorate further, and the asset is not sold by the end of that period. The entity believes that the market conditions will improve, and it has not further reduced the asset’s price. The asset continues to be held for sale, but at a price in excess of its current fair value. In that situation, the absence of a price reduction demonstrates that the asset is not marketed at a price that is reasonable in relation to its current fair value. Therefore, the conditions in IFRS 5, for an exception to the one-year requirement in paragraph 8 of the standard, would not be met. The asset would cease to be classified as held for sale.

 

How long can the period be extended? There is no clear guidance on how long the one-year period can be extended. In previous FAQ, the asset cannot continue to be classified as held for sale in the second one-year period, because it is being marketed at a price that is not reasonable in relation to its fair value. If the price had been further reduced in the second year following initial classification as held for sale, the asset could continue to be classified as held for sale. IFRS 5 requires assets that are to be recovered principally through sale, rather than through use, to be reclassified and remeasured. It seems odd that an asset that continues to be used in a business, and that has been on the market for a considerable period of time, could still be classified as held for sale. Our view is that, if a non-current asset or disposal group has not been sold after a significant period, the entity should consider whether it is being marketed at its fair value. It might also need to reconsider its selling price or its classification. The entity should consider how long the asset has been marketed, compared to its useful economic life. If an asset that is being used in the business has a remaining useful economic life of three years, and it has been on the market for two years, it is difficult to argue that the standard’s substance is being complied with. The asset’s carrying amount is being recovered principally through continued use rather than through sale.