Background
Current Indian GAAP does not prescribe comprehensive guidance on Non-current assets held for sale and discontinued operations. Under Indian Accounting Standards (Ind AS) that are converged to International Financial Reporting Standards (IFRS), Ind AS 105 has been aligned with IFRS 5 and there are no major differences between Ind AS and IFRS. Ind AS 105 also covers in an appendix the requirements specified in IFRIC 17 – Distribution of non-current assets to owners.
Scope and Definitions
Ind AS 105 provides guidance with respect to classification, measurement and presentation of all noncurrent assets/disposal groups held for sale and assets classified as held for distribution. The standard also covers classification and presentation requirements of Discontinued Operations.
Definitions
Non-current assets are assets which do not meet the definition of current assets as defined in Ind AS 1. In practical terms, non-current assets are assets which are not expected to be realised within a period of twelve months from the reporting period.
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. Thus, disposal group may contain assets or liabilities which are current in nature or assets which do not fall within the purview of this standard. Here, when an entity applies the measurement requirements of this standard it has to consider the Disposal group as a whole.
Discontinued Operation is a component of an entity that either has been disposed of or is classified as held for sale and:
• represents a separate major line of business or geographical area of operations;
• is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
• is a subsidiary acquired exclusively with a view to resale.
Criteria for Classification as “Held for sale”
Under Ind AS 105, an entity shall 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.
There are mainly two conditions which must be satisfied for an asset (or disposal group) to be classified as “Held for sale”.
1) An Asset must be Available for Immediate Sale in the Present Condition Subject to Terms that are Usual and Customary i.e. Common Practices which Exist for Sales of such Assets (or disposal groups) For example, an entity intends to sell second hand machinery and there is demand for second hand machinery in the market, however there are very few users of this particular machinery and usually it takes three to six months of time to close the sale transaction. In this case, the asset can be said to be available for immediate sale and can be considered as “held for sale” if other criteria is met.
2) Sale must be Highly Probable:
The Standard provides detailed guidance on this second condition about when can sale be said to be highly probable. The standard specified that for the sale to be highly probable:
• Appropriate level of management must be committed to a plan to sell the asset (or disposal group) and active programme to locate a buyer and complete the plan has been initiated.
• Assets (or disposal group) under consideration must be marketed at a price that is reasonable 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 such classification i.e. an entity expects to complete the sale transaction within one year from the date on which theses assets are classified as held for sale.
Measurement Principles
There are mainly three stages of measurement of assets (or disposal group) held for sale:
• Before initial classification as held for sale – Assets (or disposal group) held for sale before such classification are measured according to applicable Indian accounting standard e.g. Plant and machinery as per Ind AS 16.
• At the time of initial classification – Non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell.
• Subsequent measurement – After the classification of assets (or disposal group) as held for sale during subsequent reporting period, these assets (or disposal group) as a whole is measured at the lower of carrying amount and fair value less costs to sell.
Ind AS 105 also provides guidance on impairment testing of assets (or disposal group) classified as held for sale. Impairment testing is carried out on initial classification as well as during the subsequent measurement period. Write down of assets to fair value less cost to sell that has not been recognised as per the above mentioned criteria is recognised as impairment loss. For example, if carrying amount of non-current asset held for sale is 1,000 and fair value less cost to sell is 900, 100 will be included in profit and loss account as impairment loss.
Also, at the time of subsequent measurement, if there is any gain due to increase in fair value less cost to sell of an asset the same should be recognised to the extent of cumulative impairment loss recognised previously. For example, continuing above if there is gain of 120 based on re-measurement of non-current asset, gain to the extent of only 100 i.e. to the extent of impairment loss recognised earlier will recognised as gain in profit and loss.
Disposal group may contain assets or liabilities that are not non-current in nature or not within the scope of Ind AS 105. At the time of initial classification or during subsequent measurement, these assets or liabilities are measured or remeasured as per the standard applicable to such assets or liabilities. The measurement criteria i.e. amount lower of carrying amount and fair value less costs to sell is applied to disposal group as a whole i.e. for the disposal group itself.
For example, Disposal group contains PP&E (non-current asset) and also has inventories (current asset – not covered under Ind AS 105). Based on the individual assessment of assets applying relevant accounting standard value of disposal group let’s say is 20,000. If after applying the measurement criteria of Ind AS 105 to this disposal group as a whole value comes to 18,000 then 2,000 will be recognised as impairment loss. However, as per the standard this loss of 2,000 will be proportionately allocated only to non-current assets within the disposal group. Another important aspect that merits consideration is that the non-current assets held for sale shall not be depreciated (or amortised) individually or as a part of disposal group.
Changes to a Plan of Sale
If non-current asset (or disposal group) classified as held for sale, no longer meet the criteria specified, then such assets cease to be classified as held for sale.
In such a case, non-current asset (or disposal group) is measured at lower of:
• its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale, and
• its recoverable amount at the date of the subsequent decision not to sell.
The impact of the above change is recognised in profit and loss account.
There can be a case where some of the non-current assets of disposal group still meet the criteria of held for sale’ whereas disposal group as a whole does not meet the requirement. In such cases, these non-current assets shall be measured as per the measurement criteria of this standard in their individual capacity.
Disclosure in Financial Statements
There are mainly two disclosure requirements as per Ind AS 105 viz. disclosure requirements for:
• Non-current assets (or disposal group)
These are presented separately from other assets and liabilities (which are part of disposal group).
Also, an entity should not offset such assets and liabilities.
• Discontinued operations
There are mainly two disclosure required with respect to discontinued operations. These include (a) post-tax profit or loss and post-tax gain or loss recognised on the measurement to fair value less costs to sell or disposal group constituting discontinued operations. Both these can be presented as a single amount in the statement of profit or loss. (b) related income tax expenses as per Ind AS 12 on above.
Similarly, cash flows from discontinued operations will also form part of disclosure in cash flow statement. An entity has a choice of presenting above either in statement of profit or loss/cash flow or in notes to accounts.
Apart from above there are certain additional disclosures required by Ind AS 105 which mainly includes description of non-current assets (or disposal group), facts and circumstances leading to sale or disposal etc.
Distribution of Non-current Assets to Owners
The essence of the above guidance is that distribution of non-current assets to owners is akin to dividend distribution and hence should be accounted as such.
Appendix C of Ind AS 105 and Appendix A of Ind AS 10 contain this guidance.
This part of the standard mainly covers two types of transactions:
• Distribution of non-cash assets; and
• Distribution that give owners a choice of receiving either non-cash assets or a cash alternative.
The standard does not cover transactions where non-cash assets distributed are controlled by the same party or parties who controlled such assets before distribution or transactions where entity distributes ownership in a subsidiary but retains control.
Measurement and Presentation Requirements
As per the standard, when a company declares to distribute assets to its owners, the company should recognise liability for dividend payable when dividend is appropriately authorised and is not at the discretion of the entity.
Dividend payable liability will be measured by an entity at the fair value of the assets to be distributed where non-cash assets are distributed as dividend. Further, the standard specifies that when an entity settles the dividend payable, it shall recognise the difference, if any, between the carrying amounts of the assets distributed and the carrying amount of the dividend payable in profit or loss. The same is disclosed as a separate line item in profit or loss account.
An entity shall disclose carrying amount of the dividend payable at the beginning and end of the period and any changes in carrying amount of such liability due to changes in fair value which is reviewed at the end of each reporting period and necessary adjustments are made.
Conclusion
This accounting standard provides specific guidance on measurement and classification of Non-current assets held for sale, which does not exist under current Indian GAAP. The guidance requires measurement of such assets at lower of carrying amount and fair value less costs to sell.
Further, the standard also lays down criteria to be met for an operation to be classified as discontinuing operation.
The guidance on distribution of non-cash assets to owners requires accounting for such transactions as dividend.
The above guidance would change the accounting and disclosure requirements for the above transactions/events as compared to existing Indian GAAP.
