Accounting for non-current assets held for sale (RMG 111)

Audience

This guide applies to all officials, particularly chief financial officers and finance teams, in Commonwealth entities that have non-current assets (NCAs) that are held for sale.

For ease of reference and presentation, in this guide ‘Commonwealth entities’ refers to Commonwealth departments, agencies and Commonwealth companies as defined by the Public Governance, Performance and Accountability Act 2013.

Key points

This guide:

Resources

Introduction

  1. Commonwealth entities are required to prepare their annual financial statements in accordance with the AAS and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR).

  2. AASB 5 outlines the accounting requirements for NCAs held for sale, including for:
    • recognised NCAs of an entity (i.e. an NCA is an asset that does not meet the definition of a current asset).
    • all disposal groups of an entity (a 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).
  3. The scope of AASB 5 excludes the restructuring of administrative arrangements of Commonwealth entities. Requirements for the disclosure of assets, liabilities and items of equity resulting from the restructuring of administrative arrangements are addressed in AASB 1004 Contributions.

Part 1 – Classification as held for sale

  1. A current asset, as defined in paragraph 66 of AASB 101, is an asset that is either:
    1. expected to be realised, or is intended for sale or consumption, in the entity’s normal operating cycle
    2. held primarily for the purpose of being traded
    3. expected to be realised within twelve months after the reporting date, or
    4. cash or a cash equivalent asset (as defined in AASB 7) unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.
  2. An NCA is an asset that does not meet the above ‘current asset’ definition.

Reclassification of a non-current asset - held for sale

  1. Under paragraph 6 and 7 of AASB 5, an NCA or disposal group can only be reclassified as held for sale if:
    • its carrying amount will be recovered principally through a sale transaction rather than through continuing use
    • it is available for immediate sale in its present condition, and
    • the sale is highly probable.
  2. An entity’s intention to sell an NCA but with no specific plans to do so, does not support a reclassification of the NCA to ‘current asset’ or disclosure as ‘held for sale’.

 Sale transaction

  1. A sale transaction involves the exchange of NCAs where the exchange has commercial substance. A transaction has commercial substance when future cash flows are expected to change as a result of the transaction.
  2. Sale transactions that are not considered to have commercial substance include transactions for:
    • the exchange of an asset for the same asset
    • assets that are abandoned, gifted or destroyed – however, under paragraph 32 of AASB 5, these items may be required to be disclosed as discontinued operations where they represent a separate major line of business or geographical area of operation.
  3. For more information on determining whether a transaction has commercial substance, see paragraph 25 of AASB 116.

Immediate sale 

  1. An immediate sale is a sale that is expected to be completed within one year from the date of classification.
  2. Under Appendix B of AASB 5, the period to complete the sale can be greater than one year if there is evidence that the delay was caused by events beyond the entity’s control and the entity is still committed to sell the asset.

Sale is highly probable

  1. Under paragraph 8 of AASB 5, for a sale to be highly probable, the appropriate level of management must be committed to sell the asset, demonstrated by:
    • an active program to locate a buyer
    • the asset being actively marketed for sale with an asking price that is reasonable in relation to the asset’s current fair value
    • it being unlikely that there will be significant changes to the planned sale or that the plan will be withdrawn.

Part 2 – Accounting treatment for held for sale

  1. An illustrative example of the accounting treatment for an asset being held for sale is provided at Appendix 1 – Illustrative example.

Before reclassification as held for sale

  1. Under paragraph 18 of AASB 5, immediately prior to an NCA or disposal group being reclassified as held for sale, the carrying amount of the asset (or all the assets and liabilities in a disposal group) needs to be remeasured using the applicable AAS. In most cases, the assets will already be measured at fair value and no material adjustment would be necessary before reclassification.
  2. Entities should carefully consider whether they do alter the value of the asset immediately prior to reclassification for sale, to avoid potentially triggering the requirement to revalue the entire class. For more information, email Finance Accounting Policy.

Once held for sale

  1. AASB 5 provides the requirements for measuring assets held for sale. Where the sale is expected to:
    • result in a loss – the loss is recognised when classified as held for sale or on re measurement at balance date
    • result in a profit – the gain is not recognised until the asset is sold.
  2.  NCAs or disposal groups that meet the classification requirements as held for sale, (except where the following exclusions apply) are measured at the lower of its carrying amount and the fair value less costs to sell. This effectively recognises any expected loss from the asset sale when the classification has occurred.
AASB 5 Exclusions (as detailed at paragraph 5 of AASB 5).

The measurement provisions do not apply to the following assets, which are covered by the AAS listed, either as individual assets or as part of a disposal group:

  • deferred tax assets (AASB 112 Income Taxes)
  • assets arising from employee benefits (AASB 119 Employee Benefits)
  • financial assets within the scope of AASB 9 Financial Instruments
  • NCAs that are accounted for in accordance with the fair value model in AASB 140 Investment Property
  • NCAs that are measured at fair value less costs to sell in accordance with
  • contractual rights under insurance contracts (defined in AASB 4 Insurance Contracts).
Note: Where measurement provisions are excluded under paragraph 5 of AASB 5, the other requirements detailed in this RMG continue to apply.
  1. If the period to complete the sale is expected to be greater than one year, the selling costs are measured at their present value. The unwinding of the present value of selling costs is recognised as a financing cost.
  2. Initial write-downs of the asset or disposal group to fair value less the costs to sell, are recorded as impairment losses. In accordance with paragraph 104 (a) and (b) of AASB 136, if a write-down (impairment loss) is required, it is allocated:
    • first – to reduce the carrying amount of any goodwill allocated
    • then – to the other assets pro rata on the basis of carrying amounts, based on their percentage of the total.

Subsequent accounting

  1. Subject to AASB 5 and the following requirements, subsequent measurement is usually only performed at the reporting date and uses the same measurement rules as outlined for assets once held for sale.
  2. NCAs that meet the classification requirements as held for sale (including those that form part of a disposal group) are not depreciated (or amortised). These are measured at the lower of carrying amount and fair value less costs to sell. Depreciation stops as the asset’s economic benefit to the entity will not be recovered through continuing use.
  3. For a disposal group, the carrying amount of current assets, liabilities and NCAs that fall within the exclusions at paragraph 5 of AASB 5 are remeasured in accordance with the applicable AAS. This is to be performed before the re-measurement of the fair value less costs to sell of the disposal group as a whole.
  4. Impairment losses (asset write-downs) are recognised to the extent that the subsequent measurement provisions do not already incorporate this loss. Reversal of impairment write-downs (increase in the fair value of the asset) can occur to the amount of previously recognised impairment losses under AASB 5 or AASB 136, and to the extent that it has not already been recognised by the subsequent measurement provisions.

Part 3 – Disclosure and budget implications

Disclosure requirements

  1. Disclosure of NCAs held for sale is as required by AASB 5. In particular, under paragraph 38 of AASB 5, NCAs held for sale must be presented separately from other assets and liabilities in the statement of financial position.

Budget implications

  1. The sale of NCAs will increase (improve) the fiscal balance (when sold) and the underlying cash balance (when payment received) of an entity. All other transactions immediately before reclassification as held for sale and once held for sale, as addressed in this RMG (e.g. revaluations, depreciation and impairment), will have no budget impact.

Appendix 1 – Illustrative example

Sale of a non-current asset

Scenario: On 1 November 20X1, XYZ acquired a building to house its production facilities for $12m. XYZ carries all buildings at fair value and the building was assessed as having a useful life of 10 years. At:

  • 1 April 20X2, XYZ decided to sell the building
  • 1 May 20X2, XYZ placed the building with an agent for immediate sale. The agent charges selling costs of 5 per cent. The fair value of the building was $12.2m
  • 30 June 20X2, (balance date) the fair value less costs to sell was $12.5m.

The building was sold on 1 August 20X2 for $13m (net of selling costs).

Accounting treatment for an asset held for sale

In accounting for this scenario the building has become held for sale.

For this illustrative example:

  1. prior to applying AASB 5, the building is revalued under AASB 116 – the asset is at fair value and a net valuation approach is adopted (this approach writes back accumulated depreciation and then adjusts the gross value to fair value).
  2. apply AASB 5:
    • the asset is measured at the lower of carrying amount (i.e. $12.2m) and fair value less costs to sell (treated as an impairment loss) – calculated as follows:

 

  • the account ‘accumulated impairment’ is similar to ‘accumulated depreciation’, being an offset account rather than a direct adjustment to the carrying amount of the asset.

c. at the 30 June 20X2 balance date, the asset is required to be remeasured. The asset’s fair value less costs to sell has now increased to $12.5m, but no adjustment is required as the carrying amount of $11.59m is less than $12.5m. However, the previous impairment loss can be reversed, but only to the extent of that previously recognised ($0.61m).

 

Illustrative example: Held for sale accounting treatment

 

Debit

$’000

Credit

$’000

1 November 20X1

 

 

Dr. Building

12,000

 

Cr. Cash

 

12,000

Acquisition of building

 

 

1 April 20X2

 

 

No journal transaction – XYZ’s intention to sell without making specific plans does not constitute held for sale.

 

 

1 May 20X2

 

 

Dr. Depreciation – building [($12m / 120mths) * 6mths]

600

 

Cr. Accumulated depreciation – building

 

600

Depreciation on building until 1 May 20X2

 

 

Immediately prior to classification as held for sale:

 

 

Dr. Accumulated depreciation – building

600

 

Cr. Building

 

600

Dr. Building [$12.2m - $11.4m]

800

 

Cr. Asset revaluation reserve

 

800

Revalue building under AASB 116 a) prior to applying AASB 5

 

 

Once held for sale:

 

 

Dr. Impairment loss (expense)

610

 

Cr. Accumulated impairment loss – building

 

610

Apply AASB 5 b) lower of carrying amount and fair value less costs to sell

 

 

Subsequent accounting:

 

 

30 June 20X2

 

 

Dr. Accumulated impairment loss – building

610

 

Cr. Reversal of asset write-down (revenue)

 

610

Balance date c)

 

 

1 August 20X2

 

 

Dr. Sale proceeds (cash or receivable)

13,000

 

Cr. Building

 

12,200

Cr. Gain on sale (income)

 

800

Sale of building*

 

 

 * As per paragraph 41 of AASB 116, the revaluation surplus included in equity for the item of property, plant and equipment sold may be transferred directly to retained earnings when the asset is derecognised.


Did you find this content useful?