A simple and clear guide for CA X ACCA students
Many companies sell their assets when they restructure or change their business direction. Sometimes they even close a major division and move all operations somewhere else. These events affect financial statements in a big way, so it becomes important to present them clearly. IFRS 5 explains how to classify, measure, and present non current assets that a company plans to sell. It also explains what to do when a segment of the business is discontinued.
This article is written in simple English so that even a beginner in ACCA, CA, ICAEW, or any accounting program can understand the topic without feeling confused. It is based on careful human effort and research and follows the structure of your IFRS series.
What IFRS 5 Covers
IFRS 5 deals with two major areas.
1. Non Current Assets Held for Sale
These are assets that a company plans to sell rather than use.
2. Discontinued Operations
These are operations or business components that the company has stopped or decided to stop permanently.
Both areas require a different presentation because the company no longer intends to use these assets or continue these operations in the future.
Purpose of IFRS 5
The main purpose of IFRS 5 is to provide clear and useful information about assets that will soon be sold and operations that are no longer part of the company. Investors and other users need to understand that certain items will not generate future benefits because they will be sold soon. The standard brings transparency and makes comparison easier.
Some students mix IFRS 5 with IAS 16 or IAS 36, but IFRS 5 has its own unique classification and measurement rules.
Classification Criteria for Held for Sale
A non current asset or disposal group is classified as held for sale only when both conditions are met:
Condition 1: Asset Must Be Available for Immediate Sale
The asset must be in a condition ready for sale. There should be no major repairs or changes required. It must be ready for transfer to the new buyer.
Condition 2: Sale Must Be Highly Probable
A sale is considered highly probable if:
- The management is committed to the plan
- There is an active program to find a buyer
- The asset is advertised for sale
- The asset is expected to be sold within 12 months
- There is a reasonable price relative to fair value
If any condition fails, the asset cannot be classified as held for sale.
Measurement of Assets Held for Sale
Once an asset is classified as held for sale, IFRS 5 requires it to be measured at:
Lower of
- Carrying amount
- Fair value less costs to sell
This prevents overstating assets. Fair value less costs to sell means the price the company expects to receive minus selling expenses like commission or legal fees.
Depreciation
Depreciation stops when the asset is classified as held for sale. This is because the company no longer uses the asset for generating revenue.
Impairment
If the fair value less costs to sell falls below the carrying amount, the company recognises an impairment loss.
Disposal Groups
IFRS 5 also covers disposal groups. A disposal group is a collection of assets and liabilities that will be sold together. For example, a company may sell an entire factory along with equipment, inventory, and related liabilities. The same rules apply for measurement and classification.
What Are Discontinued Operations
A discontinued operation is a part of the business that has been disposed of or is classified as held for sale. It must be a separate major line of business or a geographical area. For example:
- Closing the entire clothing division
- Selling operations in another country
- Shutting down a large product segment
This classification helps users understand what part of profit or loss will not continue in the future.
Presentation in the Statement of Profit or Loss
Discontinued operations must be presented separately from continuing operations. The company must show:
- Profit or loss from discontinued operations
- After tax gains or losses
- Any gain or loss from disposal
This separate presentation allows users to assess future performance correctly.
Presentation in the Statement of Financial Position
Assets held for sale must be shown separately from other assets. Liabilities of the disposal group must also be shown separately. This makes the financial statements clear and easy to understand.
Reclassification Back to Held for Use
Sometimes a sale plan changes. If the criteria for held for sale are no longer met, the asset must be reclassified back to held for use. In that case:
- The asset is measured at the lower of its carrying amount (as if it was never held for sale) or its recoverable amount
- Depreciation restarts
- Any earlier impairment is reviewed
This part is often tested in exam questions.
Common Mistakes Students Make in IFRS 5
Many students find IFRS 5 easy, but they still make small mistakes that affect their marks.
Mistake 1: Forgetting Both Conditions
Some students classify assets as held for sale without checking if the sale is highly probable.
Mistake 2: Measuring at Only Fair Value
IFRS 5 requires measurement at the lower of carrying amount and fair value less costs to sell.
Mistake 3: Depreciation Mistake
Students often forget that depreciation stops after classification.
Mistake 4: Wrong Profit or Loss Presentation
Profit from discontinued operations must be shown separately.
Mistake 5: Mixing Up Disposal Group and Discontinued Operation
They are not always the same. A disposal group is about assets and liabilities. A discontinued operation is about a major business line.
Quick Solutions and Pro Tips
A simple reference table for students
| Issue | Simple Fix |
|---|---|
| Unsure about classification | Check both conditions clearly. Asset ready for sale and sale highly probable. |
| Confusing measurement rules | Always use the lower amount between carrying value and fair value less costs to sell. |
| Depreciation confusion | Stop depreciation once asset is held for sale. |
| Not sure what discontinued operations include | It must be a major business line or geographical area. |
| Mixed up disposal group and discontinued operations | Disposal group is a set of assets and liabilities. Discontinued operation is part of business activity. |
Study Tips for IFRS 5
- Make small notes of the conditions for held for sale
- Practise short scenarios where assets meet and do not meet criteria
- Compare IFRS 5 rules with IAS 36 to understand measurement
- Draw a small diagram for discontinued operations in your notebook
These simple habits help you memorise the standard easily.
IFRS 5 Frequently Asked Questions (FAQs)
1. What is the main purpose of IFRS 5?
The purpose of IFRS 5 is to give clear rules for assets that a company plans to sell and for operations that are being closed or discontinued. It ensures that these items are presented separately so users of financial statements can understand the company’s future performance more clearly.
2. When can an asset be classified as held for sale?
An asset can be classified as held for sale only when the company is committed to selling it, the asset is available for immediate sale, the sale is expected within twelve months, and the sale is highly probable.
3. How are held for sale assets measured?
These assets are measured at the lower of carrying amount and fair value minus selling costs. This means the company must not overstate the asset.
4. Can depreciation be charged on held for sale assets?
No. Depreciation stops once the asset is classified as held for sale because the company is no longer using it to generate income.
5. What is a discontinued operation?
A discontinued operation is a major line of business or a complete geographical segment that the company has either sold or plans to close permanently.
6. How are discontinued operations shown in financial statements?
The results of discontinued operations must be shown separately in the statement of profit or loss so that users can understand how much profit or loss relates to continuing activities.
7. Does IFRS 5 apply to assets that are only temporarily idle?
No. If an asset is idle but not being sold, IFRS 5 does not apply. The company must continue using normal rules of IAS 16.
8. What happens if the asset is not sold within twelve months?
If the sale does not happen within twelve months, the asset must be reclassified back to its original category unless there are valid reasons beyond the company’s control.
9. Are liabilities also classified as held for sale?
Yes. If a disposal group is held for sale, then the related liabilities are grouped and presented separately in the statement of financial position.
10. What is a disposal group?
A disposal group is a collection of assets and liabilities that are being sold together as a single package. It is treated as a unit for measurement and presentation.
11. Why does IFRS 5 require separate presentation?
Separate presentation helps investors and students understand the company’s performance more clearly. It shows which assets are leaving the business and how discontinued operations affect profit.
12. Does IFRS 5 allow revaluation gains?
No. IFRS 5 does not allow upward revaluation. The standard only allows impairment loss if fair value minus selling costs is lower than the carrying amount.
13. What disclosures are required under IFRS 5?
Companies must disclose:
- Description of the asset or operation
- Details of the sale plan
- Profit or loss from discontinued operations
- Impairment losses
- Reversal (if allowed)
14. Can goodwill be part of a disposal group?
Yes. If a disposal group includes a cash generating unit that contains goodwill, then goodwill becomes part of the disposal group.
15. Does IFRS 5 apply to financial instruments?
No. Financial instruments follow IFRS 9 rules even if the company wants to sell them.
you may also like:
- Complete IFRS and IAS Notes Index – CA x ACCA Students Guide
- IFRS 1 Explained: First-Time Adoption of IFRS (Simple Guide for Students)
- IFRS 2 Share Based Payments Explained for CA and ACCA Students
- IFRS 3 Business Combinations Explained Simply: CA X ACCA Students guide
- IFRS 4 Insurance Contracts: Simplified for CA x ACCA Students