Held for sale assets are long -lived assets for which a company has a concrete plan to dispose of the asset by sale. They are carried on balance sheet at the lower of carrying value or fair value and no depreciation is charged on them.
Many long-lived assets which a company owns are specialized in nature and they can’t be sold over-night. In many cases, it takes months since the date the company decides to sell the asset till the date a contract for sale is executed. During this period, the asset is not being used in the operations and hence not depreciation expense need to be charged on the asset.
IFRS 5 contains the international accounting rules related to held-for-sale assets which is broadly in compliance with the requirements of the US GAAP.
The asset which a company want to classify as held-for-sale must meet the following conditions:
Management must have a concrete plan to sell the asset at a price which is reasonable in relation to its fair value, The asset must be immediately available for disposal if a sale is finalized, The management is actively searching for a buyer (by advertising, engaging third-parties, etc.), and It is probable that a buyer will be found in near future i.e. within 12 months and any change to the disposal plan is unlikely.
In many cases, a company decides to sell a group of assets in a single transaction. Such a group of assets is called disposal group.
Before classifying an asset or a disposal group as held-for-sale, a company works out its carrying value. An asset’s carrying value equals its cost minus accumulated depreciation and accumulated amortization. Once the conditions mentioned above are met, the asset is classified as a held-for-sale and its carrying value is reduced if the fair value less cost to sell is lower and the difference is charged to income statement as a loss on held-for-sale assets. If the fair value less costs to sell is higher than the carrying value, no adjustment is needed, and the classification only results in additional disclosure.
Because IFRS allows a revaluation model for long-lived asset, it also allows companies to net off any impairment loss arising on held-for-sale assets against any positive revaluation surplus balance.
On 1 January 2018, JKR, Inc. decided to replace its existing machinery which it had acquired on 1 January 2015 for $40 million and initiated process for acquisition of new machinery. Simultaneously, it also initiated efforts to sell of the old machinery. The new machinery was commissioned on 30 March 2018. The company depreciates machinery assuming a zero residual value and 5-year total useful life. The carrying value of old machinery as at 1 January 2018 worked out to $16 million. If the fair value of the old machinery is $12 million and it would cost 10% of the sale proceeds to close the deal, find out when the company should classify the machinery as held-for-sale.
Because the new machinery wasn’t commissioned until 30 March 2018, it is the date when the old machinery can be reclassified as held for sale. The accumulated depreciation on the old machinery as at 30 March 2018 works out to $26 million resulting in a carrying value of $14 million.
Before reclassifying the old machinery as held for sale, JK must recognize the depreciation expense to update the carrying value:
| Depreciation expense (3/60 × 40 million) | $2 million |
| Accumulated depreciation – old machinery | $2 million |
As at 30 March 2018, JK must pass the following journal entry:
| Old machinery – held for sale (12 million × (1 – 0.1)) | $10.8 million |
| Accumulated depreciation – old machinery | $26 million |
| Loss on held for sale assets | $3.2 million |
| Old machinery - cost | $40 million |
by Obaidullah Jan, ACA, CFA and last modified on Jul 4, 2018