Ind As 105: Non-Current Assets Held for Sale and Discontinued Operations

Mergers and acquisitions often grab headlines. What happens behind the scenes, accounting-wise, when a company divests one of its divisions? Ind AS 105 provides the framework.

Ind AS 105, is an accounting standard that guides the recognition, measurement, and presentation of non-current assets held for sale and the presentation of discontinued operations in an entity’s financial statements.

This standard aims to ensure that such assets and operations are appropriately accounted for and disclosed to provide users of financial statements with relevant and reliable information.

Definition and Scope:

Ind AS 105 applies to non-current assets and disposal groups that are classified as held for sale or are in the process of being disposed of.

Non-current assets held for sale are those assets that management intends to sell in their present condition and for which a sale is highly probable within a specified timeframe.

Disposal groups are a group of assets to be disposed of together as a single transaction, for example, a subsidiary or a group of cash-generating units (CGU).

Accounting treatment under Ind As 105:

Accounting treatment under Ind AS 105 involves specific guidelines for the recognition, measurement, and subsequent accounting of non-current assets held for sale and discontinued operations. Let’s delve deeper into the key aspects of the accounting treatment:-

Recognition:

When an asset or disposal group meets the criteria for classification as held for sale, it should be recognized as such in the financial statements. This recognition signifies that the entity has committed to selling the asset or group and that it is actively pursuing a sale.

Measurement:

Non-current assets held for sale are initially measured at the lower of their carrying amount or fair value less costs to sell.

The carrying amount refers to the asset’s book value, including any accumulated depreciation or impairment losses.

Fair value less costs to sell represents the estimated amount the entity would receive from selling the asset, net of direct costs.

“Fair Value Less Costs to Sell” sounds simple, but what does it really mean?

• Fair Value: Not always what an item WOULD sell for if the company had unlimited time. This standard forces consideration of urgency (Urgent sale scenario?) or a limited potential buyer pool.
• Costs to Sell: This encompasses more than just a broker’s commission. Think legal fees, dismantling costs if the equipment is involved, and even ‘disposal’ expenses if an item simply becomes worthless due to the sale circumstance.

Impairment:

Impairment testing is an integral part of the accounting treatment for non-current assets held for sale. If the carrying amount of an asset exceeds its recoverable amount (fair value less costs to sell), an impairment loss is recognized. The impairment loss is measured as the excess of the carrying amount over the fair value less costs to sell.

Subsequent Measurement:

After initial recognition, non-current assets held for sale are measured at the lower of their carrying amount or fair value less costs to sell. Any changes in fair value subsequent to the initial measurement are recognized in the income statement. This approach ensures that the assets are valued at their estimated realizable value.

Discontinued Operations:

When an entity decides to discontinue an operation, it must classify it as a discontinued operation and present it separately in the financial statements. This classification helps users of financial statements to distinguish between continuing and discontinued operations, facilitating a clearer understanding of the entity’s financial performance.

Importance of Ind As 105:

Ind AS 105’s impairment rules prevent a dangerous game. Imagine a company holding onto outdated equipment, clinging to its original (high) value on the books. Without this standard, they could hide losses until a forced sale at rock-bottom prices makes the poor decision undeniable.

Lack of such a standard makes Enron-style accounting tricks easier – obscuring sudden losses through questionable sales or hiding underperformers is exactly what Ind AS 105 combats.

Sometimes, underperforming segments drag down a firm that has other healthy operations. Ind AS 105’s separate reporting makes those underperformers clear. This protects investors in two ways:

• The failing portion’s losses don’t obscure the ‘good’ parts.
• A discontinued operation often attracts buyers that turn it around – this upside isn’t reflected while still part of the struggling parent company.

For Example:

A manufacturer with a legacy product line faces shrinking market share and escalating costs. This entire line, which was a major pillar of the business, is deemed unprofitable to salvage. Management decides to shut down all dedicated production lines and seek to sell them alongside any remaining inventory, and even explore intellectual property (patents, etc.) divestiture.

Treatment:

• Classification: The entire line qualifies as a ‘disposal group’
• Measurement: The unique equipment has limited resale value outside the company’s specific industry – impairment is probable.
• Presentation: A separate reporting segment shows underperformance, which investors might have missed previously.

Presentation in financial statements:

Ind AS 105 requires the presentation of these assets and operations separately in the financial statements. This separation allows users to assess the financial impact of these transactions on the entity’s overall performance.

The standard also mandates specific disclosures, such as the description of the assets or disposal groups held for sale, the measurement basis used, and the results of discontinued operations.

Disclosure Requirements:

Ind AS 105 prescribes certain disclosure requirements to ensure that users of financial statements have a clear understanding of the nature and financial effects of non-current assets held for sale and discontinued operations. These disclosures include:-

• A description of the non-current assets or disposal groups classified as held for sale.
• The measurement basis is used for non-current assets held for sale and the associated liabilities.
• Information about significant terms and conditions of the sale.
• A reconciliation of the carrying amount of assets or disposal groups classified as held for sale at the beginning and end of the reporting period.
• The results of discontinued operations, including revenues, expenses, gains, and losses.

Conclusion:

Ind AS 105, Non-Current Assets Held for Sale and Discontinued Operations, is an important accounting standard that outlines the recognition, measurement, and presentation of these assets held for sale and operations.
It ensures that these assets and operations are appropriately accounted for and disclosed in an entity’s financial statements. Compliance with this standard enhances transparency, comparability, and the usefulness of financial information for users.