IFRS 5 is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). It guides firms in classifying, measuring, and disclosing non-current assets held for sale and discontinued operations. In such cases, IFRS 5 requires that companies disclose all such operations and assets separately in financial reports to ensure transparency. The IFRS 5 standard applies to all entities that present financial statements by IFRS and mandates certain disclosures and classification requirements for these transactions.
What is IFRS 5?
IFRS 5 deals with the accounting treatment of non-current assets held for sale and discontinued operations. It was designed to establish a clear framework for reporting these assets and operations so users of financial statements could distinguish continuing business activities from those being disposed of.
This covers non-current assets or disposal groups, so-called held for sale, and operations classified as discontinued within the scope of IFRS 5. It provides a framework for measurement, presentation and disclosure for these assets and operations in financial statements. This ensures businesses clearly and accurately list any assets that will be sold or abandoned. IFRS 5 (the ‘standard’) provides guidance on the accounting for assets held-for-sale, including the classification and measurement of asset groups that are classified as held-for-sale.
IFRS 5 Requirements for Asset Groups Held-for-Sale
IFRS 5 governs classification, measurement, and presentation requirements for non-current assets held for sale. These requirements assist in ensuring that assets flagged for sale are accurately reported in financial statements.
Classification of Non-Current Assets for Sale
According to Generally Accepted Accounting Principles (GAAP), a company has criteria to be met to classify an asset as held for sale. The asset should be ready for immediate sale in its present shape and condition, and its management should be determined to sell it within 12 months. A continuous effort must be to market the property and a significantly probable sale. These criteria help to ensure that only assets intended for sale are classified as such, creating transparency in financial reporting.
Measurement of Assets Held for Sale
Once an asset is classified as held-for-sale, it has to be measured at the lower of carrying tons of or honest worth minus sale prices. While these assets are in the held-for-sale category, companies cannot depreciate them. Such a practice ensures that financial statements capture the potential selling price of the asset, eliminating the risk of inflation of asset values and providing an overall fairer representation of financial health.
Presentation in Financial Statements
A company that qualifies assets as held for sale must present them separately in the balance sheet from other assets. Any related liabilities of that asset should also be disclosed separately. Also, the profit/loss on remeasurement should be reflected in the income statement. The segregated presentation enhances presentation transparency and allows investors and stakeholders to assess the financial effect of expected asset sales.
IFRS 5 Disclosure Example for Asset Groups Held-for-Sale
The disclosures include, a description of the asset or disposal group, including the carrying amount of assets and liabilities within a disposal group classified as held for sale and expected timing of purchase. They also need to report any impairment losses recognized or loss reverses. This provides transparency and enables investors to comprehend the financial implications of the planned sale.
IFRS 5 Requirements for Discontinued Operations
IFRS 5 also prescribes the information to be reported regarding discontinued operations so that such activities are separately identifiable from continuing operations in the financial statements.
Classification of Discontinued Operations
The operation must be considered a discontinuing operation if it is a separate major line of business or geographical area. It also has to be an element of an official plan to divest a major business unit or must be already sold or reported as held-for-sale. Without proper classification, it will be unclear to interested parties which business areas are no longer relevant to day-to-day operations.
Measurement of Discontinued Operations
However, the measurement of discontinued operations needs to be done under the same criteria that would have applied if the assets were classified as held for sale. In this case, the financial statements are where you must enter any gain / loss from the remeasurement, to reflect the intrinsic financial result. It helps cover misrepresentation of financial statements by revealing the true experience of discontinued operations.
Presentation in the Financial Statements
The income statement must show discontinued operations separately from continuing operations. You have to declare the profit or loss of these operations on a separate line so that investors and analysts can analyze financial performance. Cash flows from discontinued operations must also be reported, to reflect transparency in financial reporting and decision-making.
IFRS 5 Disclosure Example for Discontinued Operations
Details of discontinued operations must be disclosed, including description and period-over-period comparisons, gains, or losses on disposal or remeasurement. They also have to explain the impact on the company’s financial position. Disclosures under IFRS 5 allow investors and stakeholders to understand the impact of discontinued operations on financial performance and the business’s overall stability.
How is IFRS 5 Different from US GAAP?
IFRS 5 prescribes global principles for the accounting treatment of assets held for sale and discontinued operation, whereas US GAAP does so under ASC 360-10 and ASC 205-20 standards. A significant difference is that US GAAP permits depreciation on held-for-sale assets, but IFRS 5 does not permit depreciation once an asset has been classified.
IFRS 5 additionally brings a more stringent definition of discontinued operations, whereas US GAAP allows more flexibility in classification. IFRS 5 also mandates presenting financial statements that distinguish discontinued operations, an area where US GAAP has some flexibility. These differences illustrate how IFRS and US GAAP process and classify items differently in financials.
| Aspect | IFRS 5 | US GAAP |
| Classification as held-for-sale | Requires assets to be available for immediate sale and highly probable within 12 months | Requires assets to be available for sale but does not have a strict 12-month requirement |
| Depreciation of assets held for sale | Depreciation is discontinued | Depreciation continues until disposal |
| Classification of discontinued operations | Requires a separate major business line or geographical area | It can include smaller disposals |
| Measurement criteria | Lower of carrying amount or fair value minus costs to sell | Similar, but impairment testing may differ |
| Presentation in financial statements | Discontinued operations reported separately in the income statement | Discontinued operations may be included with continuing operations under certain conditions |
Relevance to ACCA Syllabus
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is a key area of the syllabus for ACCA Financial Reporting (FR) and Strategic Business Reporting (SBR) papers. For candidates appearing in the financial reporting and audit-related papers, the measurement and presentation of ‘held for sale’ assets in the financial statement is to be understood well.
IFRS 5 ACCA Questions
Q1: According to IFRS 5, when should a non-current asset be classified as ‘held for sale’?
A) Upon full depreciation of the asset
B) When management is committed to a plan to sell the asset, and the asset is available for immediate sale
C) That the asset is held for investment purposes
D) After 10 years of usage of the asset
Q: 3) When does the company preform an impairment loss?Ans: B) If there is a committment from management to initiate a sale plan, and the asset is available for immediate sale
Q2: How is a non-current asset held for sale measured under IFRS 5?
A) At cost less accumulated depreciation
B) At the higher of carrying amount or fair value
C) Lower of carrying amount and fair value less costs to sell
D) At historical cost
Ans: C) At the lower of carrying amount and fair value less costs to sell
Q3: How is depreciation treated on assets designated as ‘held for sale’?
A) Depreciation follows normal rules
B) Depreciation ceases from date of classification
C) The depreciation is doubled until the sale
D) Depreciation is reversed
Ans: B) Depreciation ceases from the date of classification
Q4:How do we define a discontinued operation as per IFRS 5?
A. A slight reorganization of a business unit
B) The sale of a whole subsidiary or significant business line
C) A factory temporarily closing
D) Sale of raw materials
Ans: B) Disposition of a complete subsidiary, or substantial line of business
Q5: What is the presentation requirement for discontinued operations in financial statements?
A) Part of normal operating expenses
B) On a line separate from continuing operations in the income statement
C) As an obligation on the balance sheet
D) Made insufficiently clear in financial statements
Ans: B) Below the consolidated net income in the statement of profit or loss
Relevance to US CMA Syllabus
Financial planning, reporting, and control is the US CMA syllabus. IFRS 5 influences decision-making by mandating the dumping of classification and disclosure of non-current assets held for sale and discontinued operations, thereby enabling management to make sound financial decisions about asset disposals and restructuring of operations.
IFRS 5 US CMA Questions
Q1: What is the requirement of IFRS 5 to disclose discontinued operations separately and why?
A) Improvement in financial statements transparency
B) Restructure financial ratios
C) To reduce tax liabilities
D to remove assets from the balance sheet
Ans: A) Increase transparency of financial statements
Q2: How does IFRS 5 help management make decisions?
A) It enables managers to best analyze disposal approaches
B) It removes the fair value accounting requirement
C) It necessitates instant recognition of all sale proceeds
D) It excludes impairment losses from companies
Ans: A) It helps the managers to evaluate disposal disposition effort
Q3: For an asset to be classified as held for sale under IFRS 5, which of the following must hold true?
A) Sale being very likely within one year
B) The property must be available for short-term rentals
C) It must be fully depreciated asset
D) The asset gets moved to other department
Ans: A) The sale should be highly probable within a year
Q4: What are the rules related to impairment losses for assets held for sale?
A) At the time of sale
B) Not until the end of the financial year
C) Upon initial categorization and upon each decrease in fair value thereafter
D) At the time of reclassifying the asset as non-current
Ans: C) At the time of initial classification and at any increase in fair value thereafter
Q5: Will IFRS 5 Impact Companies Financially?
A) It provides more transparent financial reporting
B) It lowers the disclosures needed
It removes the need for impairment testing.
D) It enhances the carrying value of non-current assets
Ans: A) It increases financial reporting transparency
Relevance to US CPA Syllabus
IFRS 5 appears on the FAR section of the US CPA exam. The interpretation is consistent with US GAAP (ASC 360 (Property, Plant, and Equipment) and ASC 205-20 (Discontinued Operations)) on dispositions of assets and how to classify operations as discontinued.
IFRS 5 US CPA Questions
Q1: What US GAAP standard has the most similarities with IFRS 5?
A) ASC 842
B) ASC 205-20
C) ASC 606
D) ASC 350
Ans: B) ASC 205-20
Q2: Under IFRS 5, what are the treatment of liabilities associated with a discontinued operation?
A) They are aggregated with other liabilities
B) They are shown separately from continuing operations liabilities
C) They are instantly dismissed
D) Excluded from financial statements
Ans: B) They are classified as separate line item from continuing operations liabilities
Q3: The assets and businesses are designated as “held for sale.” What happens to such assets if they’re not sold?
A) Classified as an asset under non-current asset
B) It should be written off
C) Treat it like a liability
D) It must stay in ‘held for sale’ forever
Ans: A) It can be reclassified as a non-current asset
Q4: What is one of the most significant financial implications of classifying an asset as ‘held for sale’?
A) Depreciation stops
A) The asset remains on the balance sheet
C) The asset is amortized even though the charge is expensed
D) Asset is recorded at the historical cost
Ans: A) Depreciation stops
Q5: What should be considered in determining whether to present discontinued operations separately?
A) When you expect you will be living here for more than a year
B) When they account for a significant business line or geography
C) When they sin a high value transaction
D) Whenever management deems it necessary
Ans: B) As it acts as single point for major line of business or geographical area
Relevance to CFA Syllabus
IFRS 5 is important for CFA candidates in financial reporting and analysis. Determining impacts the financial ratios, valuation model, and earnings quality assessment, making it a key consideration area for investment analysis and decision-making.
IFRS 5 CFA Questions
Q1: What is the impact of IFRS 5 on financial analysis? Why are cash flows expected to be more broadly relevant across firms?
A) They enhance the comparability of financial statements.
B) Downplays the significance of financial disclosures
C) It makes companies valued more
D) It gets rid of financial ratios
Ans: A) It enhances comparability of financial statements
Q2: How do analysts handle discontinuing operations in their earnings calculations?
A) Remove them from continued operations analysis
B) Add them in to core business top line
C) Leave them out of the financial models
D) Think of them like a rare item
Q: A) Remove them from continuing operations evaluation
Q3: Which of the following would NOT be considered a discontinued operation?
A) Minor product line sale
B) Divestiture of an entire business segment
C) An end to the most significant geographical entity
D) Disposal of an important business division
Ans: A) Sale of a minor product line
Q4: Why do investors care about IFRS 5?
A) It assists in isolating manifestations of nonrecurrent and recurring income sources
B) It gives companies an incentive to combine all financial data into a single statement
C): It decreases the volume of impairment testing
D) It pushes net profit calculations higher
Ans: A) It helps distinguish between the one-time income stream & recurring income streams
Q5: What is the effect of ceased operations on financial ratios under IFRS 5?
A) It helps enhance profitability analysis accuracy by excluding non-one-time events
B) It avoids cash flow analysis
C) It artificially increases reported earnings
D) It has no impact on financial ratios
Ans: A) Separates non-recurring items which avoid dilution of profitability analysis
