immediate sale would therefore be met at the plan commitment date.
(b) The entity will continue to use the building until construction of a new headquarters building is completed.
The entity does not intend to transfer the existing building to a buyer until after construction of the new
building is completed (and it vacates the existing building). The delay in the timing of the transfer of the
existing building imposed by the entity (seller) demonstrates that the building is not available for immediate
sale. The criterion would not be met until construction of the new building is completed, even if a firm
purchase commitment for the future transfer of the existing building is obtained earlier.
2
Sale of a manufacturing facility
An entity is committed to a plan to sell a manufacturing facility and has initiated actions to locate a buyer.
At the plan commitment date, there is a backlog of uncompleted customer orders.
(a) The entity intends to sell the manufacturing facility with its operations. Any uncompleted customer
orders at the sale date will be transferred to the buyer. The transfer of uncompleted customer orders at
the sale date will not affect the timing of the transfer of the facility. The criterion of being available for
immediate sale would therefore be met at the plan commitment date.
(b) The entity intends to sell the manufacturing facility, but without its operations. The entity does not
intend to transfer the facility to a buyer until after it ceases all operations of the facility and eliminates
the backlog of uncompleted customer orders. The delay in the timing of the transfer of the facility
imposed by the entity (seller) demonstrates that the facility is not available for immediate sale. The
criterion would not be met until the operations of the facility cease, even if a firm purchase commitment
for the future transfer of the facility were obtained earlier.
3
Land and buildings acquired through foreclosure
An entity acquires through foreclosure a property comprising land and buildings that it intends to sell.
(a) The entity does not intend to transfer the property to a buyer until after it completes renovations to
increase the property’s sales value. The delay in the timing of the transfer of the property imposed by
the entity (seller) demonstrates that the property is not available for immediate sale. The criterion of
being available for immediate sale would therefore not be met until the renovations are completed.
(b) After the renovations are completed and the property is classified as held for sale but before a firm
purchase commitment is obtained, the entity becomes aware of environmental damage requiring
remediation. The entity still intends to sell the property. However, the entity does not have the ability to
transfer the property to a buyer until after the remediation is completed. The delay in the timing of the
transfer of the property imposed by others before a firm purchase commitment is obtained demonstrates
that the property is not available for immediate sale (different requirements could apply if this happened
after a firm commitment is obtained, as illustrated in scenario (b) of Example 4.2 below). The criterion
that the asset be available for immediate sale would not continue to be met. The property would be
reclassified as held and used in accordance with the requirements discussed at 2.2.5 below.
Non-current assets held for sale and discontinued operations 187
2.1.2.B
Meaning of highly probable
Many observers may consider the meaning of ‘highly probable’ to be reasonably self-
evident, albeit highly judgemental. However, IFRS 5 provides extensive discussion of the
topic. As a first step, the term is defined by the standard as meaning ‘significantly more likely
than probable’. This is supplemented by a second definition – probable is defined as ‘more
likely than not’. [IFRS 5 Appendix A]. Substituting the latter into the former leads to a definition
of highly probable as meaning ‘significantly more likely than more likely than not’.
The standard goes on to elaborate as follows:
For the sale to be 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;
• the sale should be expected to qualify for recognition as a completed sale within
one year from the date of classification (although in certain circumstances this
period may be extended as discussed below); 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 5.8].
As noted above, the classification, presentation and measurement requirements of
IFRS 5 applicable to assets (or disposal groups) classified as held for sale also apply to
those classified as held for distribution to owners acting in their capacity as owners
(see 2.1.2 above). [IFRS 5.5A].
For the distribution to be highly probable, actions to complete the distribution must have
been initiated and should be expected to be completed within one year from the date of
classification. Actions required to complete the distribution should indicate that it is
unlikely that significant changes to the distribution will be made or that the distribution
will not be completed. Whilst judgement will be needed in individual circumstances,
relevant actions to consider could include: the steps taken by management to prepare for
the distribution, board decisions illustrating the commitment to the planned distribution,
and steps taken to organise the meeting of shareholders, if their approval is required. The
probability of shareholders’ approval, if this is required, should be considered as part of
the assessment of whether the distribution is highly probable. [IFRS 5.12A].
The basic rule above that for qualification as held for sale the sale should be expected
to qualify for recognition as a completed sale within one year from the date of
classification (the ‘one year rule’) is applied quite strictly by the standard. In particular,
that criterion would not be met if:
(a) an entity that is a commercial leasing and finance company is holding for sale or
lease equipment that has recently ceased to be leased and the ultimate form of a
future transaction (sale or lease) has not yet been determined;
(b) an entity is committed to a plan to ‘sell’ a property that is in use, and the transfer
of the property will be accounted for as a sale and finance leaseback. [IFRS 5.IG4].
188 Chapter
4
In (a), the entity does not yet know whether the asset will be sold at all and hence may
not presume that it will be sold within a year.
In (b), whilst in legal form the asset has been sold it will not be recognised as sold in the
financial statements.
Once an entity applies IFRS 16 – Leases (for periods beginning on or after
1 January 2019), the provisions of IFRS 5 set out at (b) above become ‘an entity is
committed to a plan to “sell” a property that is in use as part of a sale and leaseback
transaction, but the sale does not qualify to be accounted for as a sale ...’ in accordance
with IFRS 16. This is discussed in Chapter 24 at 8.
As indicated above, the standard contains an exception to the one year rule. It states
that events or circumstances may extend the period to complete the sale beyond one
year. Such an extension would not preclude an asset (or disposal group) from being
classified as held for sale if the delay is caused by events or circumstances beyond the
entity’s control and there is sufficient evidence that the entity remains committed to its
plan to sell the asset (or disposal group). This will be the case in the following situations:
[IFRS 5.9]
(a) at the date an entity commits itself to a plan to sell a non-current asset (or disposal
group) it reasonably expects that others (not a buyer) will impose conditions on
the transfer of the asset (or disposal group) that will extend the period required to
complete the sale; and:
(i) actions necessary to respond to those conditions cannot be initiated until
after a firm purchase commitment is obtained; and
(ii) a firm purchase commitment is highly probable within one year;
(b) an entity obtains a firm purchase commitment and, as a result, a buyer or others
unexpectedly impose conditions on the transfer of a non-current asset (or disposal
group) previously classified as held for sale that will extend the period required to
complete the sale; and
(i) timely actions necessary to respond to the conditions have been taken; and
(ii) a favourable resolution of the delaying factors is expected;
(c) during the initial one year period, circumstances arise that were previously
considered unlikely and, as a result, a non-current asset (or disposal group)
previously classified as held for sale is not sold by the end of that period; and
(i) during the initial one year period the entity took action necessary to respond
to the change in circumstances;
(ii) the non-current asset (or disposal group) is being actively marketed at a price
that is reasonable, given the change in circumstances; and
(iii) the non-current asset (or disposal group) remains available for immediate sale
and the sale is highly probable. [IFRS 5 Appendix B].
Firm purchase commitment is a defined term in IFRS 5, meaning an agreement with an
unrelated party, binding on both parties and usually legally enforceable, that:
Non-current assets held for sale and discontinued operations 189
• 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. [IFRS 5 Appendix A].
The word ‘binding’ in this definition seems to envisage an agreement still being subject
to contingencies. The standard provides an example where a ‘firm purchase
commitment’ exists but is subject to regulatory approval (see scenario (a) in Example 4.2
below). In our view, to be ‘binding’ in this sense a contingent agreement should be only
subject to contingencies outside the control of both parties.
The standard illustrates each of these exceptions to the one year rule with the following
examples. [IFRS 5.IG5-7].
Example 4.2:
Exceptions to the ‘one year rule’
Scenario illustrating (a) above
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 for an exception to the
one year requirement would be met.
Scenario illustrating (b) above
An entity is committed to a plan to sell a manufacturing facility in its present condition and 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 not previously known to exist. The entity is required by the
buyer to make good the damage, which will extend the period required to complete the sale beyond one year.
However, the entity has initiated actions to make good the damage, and satisfactory rectification of the
damage is highly probable. In that situation, the conditions for an exception to the one year requirement
would be met.
Scenario illustrating (c) above
An entity is committed to a plan to sell a non-current asset and classifies the asset as held for sale at that date.
(a) During the initial one year period, the market conditions that existed at the date the asset was classified
initially 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 solicited but did not receive any reasonable offers to purchase the asset
and, in response, 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 regarding availability for immediate
sale which is highly probable are therefore met. In that situation, the conditions for an exception to the
one year requirement would be met. At the end of the initial one year period, the asset would continue
to be classified as held for sale.
(b) During the following one year period, 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 has
not further reduced the price of the asset. 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 available for immediate sale. In addition, to meet the condition that a sale be highly
probable also requires an asset to be marketed at a price that is reasonable in relation to its current
fair value. Therefore, the conditions for an exception to the one year requirement would not be
met. The asset would be reclassified as held and used in accordance with the requirements
discussed at 2.2.5 below.
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2.1.2.C Abandonment
IFRS 5 stipulates that a non-current asset (or disposal group) that is to be abandoned
should not be classified as held for sale. This includes 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. The standard explains that this
is because its carrying amount will be recovered principally through continuing use.
[IFRS 5.13].
If the disposal group to be abandoned meets the criteria for being a discontinued
operation the standard requires it to be treated as such in the period in which the
abandonment occurs. [IFRS 5.13]. This is discussed at 3.1 below. However, a non-current
asset that has been temporarily taken out of use should not be accounted for as if it had
been abandoned. [IFRS 5.14]. An example given
by the standard is of a manufacturing
plant that ceases to be used because demand for its product has declined but which is
maintained in workable condition and is expected to be brought back into use if
demand picks up. The plant is not regarded as abandoned. [IFRS 5.IG8]. However, in these
circumstances an impairment loss may need to be recognised in accordance with IAS 36
(discussed in Chapter 20).
2.1.3
Partial disposals of operations
2.1.3.A
Loss of control of a subsidiary
The standard provides that when an entity is committed to a sale plan involving loss of
control of a subsidiary it should classify all the assets and liabilities of that subsidiary as
held for sale when the relevant criteria are met (see 2.1 above). This is regardless of
whether it will retain a non-controlling interest in the former subsidiary after the sale,
such as for instance an interest in an associate or a joint venture. [IFRS 5.8A].
If the retained interest represents a joint operation, it could be argued that, since the
entity retains a direct interest in the underlying assets and obligations for the liabilities
after the disposal, the transaction is in substance a sale of parts of the underlying assets
and liabilities. On that basis, only the disposed of parts of the assets and liabilities would
be classified as held for sale. The counter argument is that the requirement in IFRS 5
does not scope out situations in which the retained interest represents a joint operation.
Furthermore, the loss of control of a subsidiary is a significant economic event in that
it changes the relationship between the entity and the investee fundamentally, and
therefore it would be appropriate to classify all assets and liabilities of the subsidiary as
held for sale. Some further argue that classification as held for sale will depend on
whether the operation of the joint operation represents a business. If it does, it could
be argued that the principles of IFRS 3 – Business Combinations – should be applied,
which demonstrates that effectively all assets and liabilities of the subsidiary are being
disposed of. On that analysis, classification of all assets and liabilities of the subsidiary
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 38
