FAC3702 IFRS 5 – Recap of theory, impairments, reversals of impairment and example

IFRS 5 - NCAHFSWHAT IS IT?

Classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

Such assets and liabilities shall be remeasured to the lower of carrying amount and fair value less costs to sell and carried as current items on the face of the statement of financial position.

IFRS 5 - NCAHFS

CRITERIA TO QUALIFY AS HELD FOR SALE:IFRS 5 makes it clear that items should only be classified as held for sale once they have met all the criteria!• Available for immediate sale in its current condition subject only to terms that are usual and customary for sale of such assets AND its sale must be highly probable.• For the sale to be highly probable:

o Management must be committed to a plan to sell the asset, ANDo An active program to locate a buyer and complete the plan must be initiated.

•Asset must be actively marketed for sale at a price that is reasonable. •The sale should be expected to qualify for recognition as completed sale within one year from date of classification•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the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn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 – Initial MeasurementThe carrying amount of a non‐current asset (or all the assets and liabilities in a disposal group) shall, immediately before the initial classification as held for sale, be measured in accordance with the applicable IFRSs.

An entity shall measure a non‐current asset (or disposal group) classified as held for sale at the lower of its carrying amount (at the moment of reclassification) and fair value less costs to sell – this adjustment is an impairment loss. (IFRS 5.15)

If it falls outside the scope of IFRS 5 the individual item shall instead be carried at the value determined by applying the relevant standard relating to that asset. For example IAS 40 and IAS 2

IFRS 5 – Initial Measurement for a Disposal GroupSTEP 1:Determine the carrying amount of all the individual assets in the disposal group at date of classification by applying the IFRSs applicable to them.

STEP 2:Determine the fair value less costs to sell of the disposal group.Note: CGT is excluded specifically per the definition of costs to sell.

STEP 3:Determine the lower of carrying amount and fair value less costs to sell.Measure the disposal group held for sale at the lower of the two figures calculated.

STEP 4:Calculate the impairment loss (Carrying amount less figure calculated in step 3)

STEP 5:Allocate the impairment loss to non-current assets within the scope of the measurement requirements of IFRS 5If outside the scope carried at their values determined by applying their applicable standards.

IAS 40 and IAS 2

IFRS 5 – Subsequent MeasurementAssets or disposal groups classified as held for sale will have to be remeasured to its fair value less costs to sell if a year-end occurs between the date of initial classification as held for sale and the final date of disposal.

Outside Scope Inside Scope

Remeasured in accordance with applicable Standards before the fair value less costs to sell of the disposal 

group is remeasured

Remeasured to the "new" fair value less costs to sell, 

resulting in a further impairment loss or a reversal of a previous impairment 

loss

IFRS 5 – Presentation and DisclosureNCAHFS NOTE - REMEMBER!

1) A decision to dispose of the assets – Name the asset/ group the assets form part of that is being disposed.

2) When was the decision taken.3) Formal detailed plan was approved.4) At a stage of completion – no realistic possibility of withdrawal exists.5) Sale expected to be completed by when? Cash or credit (how)?6) Disposal group – amounts are at fair value less cost to sell at year-end (further

impairment/ reversal of impairment?)7) Remember special rules IAS 2 and IAS 40.8) Narrative information – impairment loss/ reversal of impairment recognised.

- Amount thereof- Where included in Statement of profit or loss and other comprehensive

income

IFRS 5 – Impairment Reversal

At initial classification and measurement as well as subsequent remeasurement for instance year-end

The impairment loss calculated will be treated in terms of IFRS 5. DT Impairment loss account in P/L (NOT Revaluation surplus)CR NCAHFS account in SFP (NOT PPE or Investment property accounts!!)

Disposal group- allocate to assets that fall within the scope of IFRS 5 only.

Do not allocate to current assets (inventory, debtors etc.) or if outside the scope

Outside scope = IAS 40 Fair value model

IFRS 5 – Impairment Loss

Gain for any subsequent increase in fair value less costs to sell of an asset

Not in excess of the cumulative impairment loss that has been previously recognised

IFRS 5 – MeasurementExample- Question 14 extract from TUT102

MachineryKhona Ltd purchased a machine which was immediately available for use, as intended by management, on 1 September 20.10 for R2 400 000. The machine has an estimated useful life of 650 000 units, with a residual value of R250 000.

However, due to the fact that the machine did not meet its expected production capacity, the directors decided to dispose of it. A detailed formal disposal plan was publicly announced and on 30 April 20.13 the disposal was at a stage of completion where no realistic possibility of withdrawal existed. A binding sales agreement for the machine was concluded and management expects the sale to be completed on 20 December 20.13. The machine will be sold for cash.

From acquisition date until 31 October 20.12, the machine had produced a total of 185 000 units. 

During the current financial year until 30 April 20.13, the machine had produced 70 000 units. On 30 April 20.13 the machine’s fair value less costs to sell, was determined to be R1 200 000.

On 31 October 20.13, the fair value less costs to sell of the machine increased to R1 300 000 due to an unprecedented demand for this type of machinery.

IFRS 5 criteria

Depreciation = units of 

production method

Impairment and reversal of impairment?

IFRS 5 – MeasurementExample- Question 14 extract from TUT102

Details on a Timeline:

1 Sept 2010 1 Nov 2012 30 April 2013 31 Oct 2013Purchased Beginning of year Transfer to NCAHFS Year‐end

Cost = R2 400 000 FV – cost to sell  FV – cost to sell Useful life= 650 000 units = R1 200 000 = R1 300 000Res. Value= R250 000

185 000 units produced 70 000 units produced

Current financial year

Example- Question 14 extract from TUT102

30 April 2013 – Initial measurement Day of transfer to NCAHFS

STEP 1: DETERMINE CARRYING AMOUNT

Cost = R2 400 000Accumulated depreciation BOY = ((2 400 000 - 250 000) / 650 000) x 185 000) = R611 923

Carrying amount 31 October 20.12 (BOY) = 2 400 000 – 611 923 = R1 788 077

Current year depreciation up till date of transfer to NCAHFS = ((2 400 000 - 250 000) / 650 000) x 70 000) = R231 538

Final carrying amount on day of transfer = 1 788 077 – 231 538 = R1 556 539

Example- Question 14 extract from TUT102

30 April 2013 – Initial measurement Day of transfer to NCAHFS

STEP 2: DETERMINE LOWER OF CARRYING AMOUNT AND FAIR VALUE LESS COST TO SELL

Final carrying amount on day of transfer = 1 788 077 – 231 538 = R1 556 539

Fair value less cost to sell on 30 April 2013 (given) = R1 200 000 = LOWEST!

STEP 3: CALCULATE IMPAIRMENT LOSS = Carrying amount LESS FV-cost to sell= 1 556 539 – 1 200 000= R356 539

Example- Question 14 extract from TUT102

STEP 4: REMEASURE AT YEAR- END 31 October 2013(NCAHFS Currently sitting on R1 200 000 from initial measurement)

3 Scenarios:1) Fair value less cost to sell = R1 300 000 at year-end

Reverse impairment loss previously recognised with R100 000 (1 300 000 – 1 200 000)

Limited to the impairment loss previously recognised of R356 539

2) Fair value less cost to sell = R1 200 000 at year-end Value stayed the same- nothing happens/ changes

3) Fair value less cost to sell = R 900 000 at year-endFurther impairment loss is recognised in P/L 1 200 000 – 900 000 = R300 000

IFRS 5 – Allocation of an Impairment Losses

Impairment loss calculated = R116 250

Carrying amounton initial

ClassificationR

Impairment loss

AllocatedR

Carrying amount after

impairment allocatedR

Machinery [5 096 000 / 5 816 250 x 116 250] = 101 854

5 096 000 101 854 4 994 146

Software package [720 250 / 5 816 250 x 116 250] = 14 396

720 250 14 396 705 854

Inventory 550 000 nil 550 000

6 366 250 116 250 6 250 000

5 096 000 + 720 250= 5 816 250

Allocate only to non‐current assets!Inventory = current

IFRS 5 – Disclosure of the NoteANSWER (Disclosure):3. Non-current assets held for saleA decision to dispose of the assets of the Gauteng bottling plant was taken on 31 October 20.10 after a formal detailed disposal plan for the assets of the bottling plant was approved. The plan regarding the once-off sale of the assets was at a stage of completion on 31 December 20.10, where no realistic possibility of withdrawal existed. It is expected that the plan for the sale of the assets will be completed by 1 May 20.11 for cash.

The disposal group under discussion comprises:

An impairment loss of R116 250 was recognised upon initial classification of the disposal group as held for sale. The impairment loss was included under loss after tax o remeasurement on the face of the statement of profit or loss and other comprehensive income.

Assets R

Plant and equipment 4 994 146

Intangible assets 705 854

Inventory (550 000 – 25 000) 525 000

6 225 000

Same as IFRS 5 criteria

Final amounts after impairment loss 

allocated at year‐end

IAS 2 special rules. Write-down to NRV at Y/E

Contact us

• The course telephone number: 012 429 4268

• Please send all e‐mails to: FAC3702‐18‐S1@unisa.ac.za (Semester 1) orFAC3702‐18‐S2@unisa.ac.za (Semester 2)