LECTURE 1

MFRS 5: Non-current Assets Held

for Sale and Discontinued
Operations
 Learning Outcomes
At the end of this lecture, you should be able to:
• State the requirements for classification,
measurement and presentation of non-
current assets held-for-sale
• Apply the accounting treatment and
disclosure of non-current assets held-for-sale
and discontinued operations in the financial
statements

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 Reference
• Lazar & Huang (2014), Ch 6.
• Lam & Lau (2012), Ch. 22.

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 Non-current Assets held-for-sale(HFS)

A held-for-sale asset is one that:

• will not be used on a continuing basis, and
• whose carrying value will be recovered
principally through the sale of that asset.

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 Disposal group
• A disposal group is a group of assets that will
be disposed of along with related liabilities in
a single transaction. The group includes
goodwill if it is a CGU and goodwill has been
allocated to the CGU.

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 What is a cash-generating unit?
• It is the smallest unit (of asset) for which cash
flows can be identified that are largely
independent of the cash inflows from other
assets or groups (MFRS 136).

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 Discontinued operations
• A discontinued operation is a major line of
business or geographical area of operation
that is being held for disposal or has been
disposed of. It is a CGU or a group of CGU.
• A subsidiary acquired exclusively with a view
to sell is also a discontinued operation (D.O.).

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 HFS Non-current Assets and Disposal group

Under MFRS 5, a non-current asset or disposal

group can be classified as ‘held for sale’ if the
carrying amount will be recovered principally
through a sale transaction rather than through
continuing use (VIU does not arise!).
Partial Disposal
If only a part of an asset is to be sold, the asset
does not fall within the scope of MFRS 5 as the
carrying amount of the asset is not recovered
principally through sale.
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 ‘Held for sale’ classification

Two important factors must be present for it to

be classified as held for sale:
– It must be made available for immediate sale in
its present condition, and
– The sale is highly probable (i.e. almost certain)

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 Probable sale
For the sale to be highly probable:
– Management is committed to the plan to sell.
– There is an active programme to locate a buyer and the
plan to sell has been initiated.
– The asset /disposal group is being actively marketed, and
the asking price is reasonable (usually at FMV)
– The actions required to complete the sale indicate that the
plan will not be significantly changed or withdrawn; and
– Subject to certain exceptions, the sale is expected within
twelve months.
• An asset that is being abandoned is not to be treated as ‘held
for sale’. Example 6

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 Example 1(a)
• An entity intends to dispose of its office
building and the time taken to vacate is two
months (the norm).
• The building can be classified as HFS on the
commitment date as the period taken to
vacate is the norm.

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 Example 1(b)
• An entity has found a buyer with a firm commitment
to buy its office building. However, the entity intends
to use the office building until the completion of the
construction of its new building.
• The office building cannot be classified as HFS until
the completion of its new building. This is because
the timing for vacating the old building falls outside
the HFS definition of commitment to sell. However
the old building can be classified as HFS after the
new building is ready for occupation.
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 Example 1(c)
• An entity is committed to a plan to sell its
building and lease back the building on a
finance lease.
• The building cannot be classified as HFS as it is
not a sale but a loan arrangement. However, if
the leaseback were an operating lease, the
asset may qualify as HFS.

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 Example 1(d)
• An entity has some equipment that has
recently been returned by the lessee and the
entity has not decided whether to sell or lease
them.
• The equipment cannot be classified as HFS
due to uncertainty of sale.

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 Example 1(e)
• An entity commits to dispose of its factory
including unfulfilled orders from customers.
• The factory can be classified as a disposal
group HFS as it is available for immediate sale.

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 Example 1(f)
• As per example 1(e), assume that the entity
wants to fulfil all the present order of
customers. The factory will only be transferred
after the entity ceases operating the factory.
• The factory cannot be classified as HFS until
operation ceases, where commitment to sell
begins.

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 Extension of period of sale

An extension > 12 months is allowed if:

• the circumstances or events causing the
delay are beyond the control of the
entity; and
• the entity is still committed to sell.

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 Extension of period of sale
The following are situations where an extension of the
12-month period can be acceptable:
1. Asset transfer is subject to legal provisions which is beyond
the control of the sale and purchase parties
2. The buyer or others unexpectedly impose conditions for the
sale to take place but actions to respond to the conditions
are undertaken and the outcome is expected to be
favourable;
3. During the one year period, circumstances arise that were
previously considered unlikely and as a result, the asset is
not sold by the end of the period.
Examples 2 to 4 of main text.

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 Example 2
• An entity commits to sell its building and the
buyer needs to obtain a bank loan to buy the
building. The legal procedures including the
registration of the transfer with the land office
will take more than 12 months.
• The regulatory procedures cannot be initiated
until a buyer has made a firm commitment.
• The building can still be classified as HFS as an
extension of the 12-month period is acceptable.
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 Example 3
• An entity has made a commitment to sell a building
in its present condition and classifies it as HFS. The
buyer makes a firm purchase commitment but on
inspection of the building, he requests the seller to
make good some environmental damage of the
building which was NOT previously known.
Rectification work plus sale period will exceed 12
months.
• In this case the building can still be classified as HFS
as the extension period is allowable.
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 Example 4
• An entity makes a firm commitment to sell its
office block at a reasonable price. During the
12-month period there was a glut of office
space and prices dropped. The entity reduced
the asking price to a reasonable amount.
• The building can still be classified as HFS.

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 Example 4
• If in the second year, prices of office blocks
drop further, but the seller believed that the
market condition would improve and did not
reduce the asking price which was more than
its current fair value, then the building in year
2 cannot be classified as HFS and should be
treated under MFRS 116 – PPE., i.e. subject to
depreciation.

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 Recap
Non-current assets or disposal group acquired with
view to sale can be classified as ‘held for sale’
only if:
• the sale is expected to be completed within 12
months from the date of acquisition; and
• It is highly probable that any other criteria that are
not met at that date will be met within a short period
following the acquisition.
Example 5 of main text

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 Example 5
• A bank acquired a property through a
foreclosure where the borrower was unable to
settle his loan. The bank intends to sell the
property to the highest bidder immediately.
• The property can be classified as HFS.
• If the bank intends to repair the property
before selling it, the property cannot be
classified as HFS until the repair is done.

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 Measurement
• HFS assets are measured at the lower of
carrying amount and FVLCD.
• They are not to be depreciated.
Example 7 of main text

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 Example 7
• On 31.12.12 an entity committed to dispose of a
plant. The carrying amount was RM500,000 and the
current market price of the plant is RM600,000 but
it would cost the entity RM20,000 to dispose of it. If
the entity were to continue to use the asset, it
would enjoy economic benefits estimated at
RM400,000. Show how the plant should be valued.
• Answer: as it is classified as HFS, the plant will be
measured at the lower of RM500K and RM580K. VIU
is not applicable in this case.
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 Impairment losses and reversals
• On initial classification as HFS, any write-
down of the asset to FVLCD shall be
recognised as an impairment loss.
• A “gain” shall be recognised for any
subsequent increase in FVLCD, but not in
excess of the cumulative impairment loss
that has been recognised.
Example 8, 10,11,12 and 13 of main text

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 Example 8
• On 1 Dec x4, a plant had a carrying value of
RM250K, but its carrying value was
remeasured to RM245K. On classification as
HFS, the FVLCD was RM230K. On 1 Mar x5, the
FVLCD was a) RM240K; b) RM255K.
• Show how the plant should be valued on 1
Dec x4 and 1 Mar x5.

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 Example 8
First the plant has to be written down to RM245K. On
classification as HFS, it will be re-measured at RM230K
(impairment = 15K).
a) On 1 Mar there is a reversal of impairment and the
plant will be measured at RM240K. The gain of
RM10K (which is <15K) will be taken to P/L.
b) On 1 Mar there is a reversal of impairment and the
plant will be measured at RM245K (and not RM255K)
which is the CV immediately before being classified
as HFS and the gain taken to P/L.
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 Example 10
• XYZ purchased a building on 1.1.x1 for
RM500K. The useful life was estimated to be
20 years and the residual value is nil. On 1 Jul
x5, the building was classified as HFS and the
FVLCD was RM300K.
• Discuss the accounting treatment of the
building.

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 Example 10
• The CV of the building on 1 Jul x5 would be
500x15.5/20 = RM387,500.
• As the FVLCD (300K) < CV, the building would be
written to RM300K.
• The difference between CV and FVLCD of
RM87,500 (impairment) would be written to P/L.
• The depreciation charge for year x5 would be
limited to first 6 months (500/20 x ½ =12,500).

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 Example 11
• The facts are in Example 10 except that in Jan
x6, the FVLCD was revised to a) RM400K, b)
RM350K, and c) RM270K and the entity was
still committed to dispose of the asset.
• How would the changes in the FVLCD affect
the CV of the asset?

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 Example 11
a) In example 10, the CV was written down to RM300K
after adjusting for RM87,500 loss. In this case, there
was a reversal of impairment loss and the reversal
would be recognised as a gain to P/L but limited to
RM87,500.
b) The asset would be carried at RM350K and the
reversal of RM50K can be recognised as gain and
written to P/L.
c) there was further impairment of RM30K and the CV
should be RM270K. The impairment loss goes to P/L.
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 Change of plan
• Criteria to be classified as HFS no longer met
• Reclassified as non-current asset at the lower
of (i) carrying amount of asset before it was
classified as held for sale (HFS) adjusted for
depreciation and (ii) recoverable amount at
date of reclassification.
Example 14

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 EXAMPLE 14
An entity acquired a plant for RM1 mil on 1.1.x1.
The economic life was determined to be 10 years
with no residual value.
On 1.10.x4 the plant was classified as HFS and the
FVLCD was RM600,000.
On 1.7.x5 the plant did not meet the criteria to be
classified as HFS. The VIU then was calculated to be
RM700,000 and the FVLCD RM575,000.
Show how the entity should account for the plant.
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 EXAMPLE 14
• On 1.10.x4 the carrying value (CV) of the plant
would be RM1 mil(10-3.75)/10 = M625,000. The
plant would be measured at RM600K as FVLCD <
carrying value.
• The plant would not be further depreciated.
• On 1.7.x5 the asset was reclassified as a PPE under
MFRS 116 (PPE). The amount assigned to the plant
would be lower of the CV (as though it was never
classified as HFS) and its recoverable amount.

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 EXAMPLE 14
• The CV of the plant if it were not classified as
HFS would be RM1 mil(10-4.5)/10=RM550K.
• The recoverable amount (RA) was the higher
of VIU and FVLCD which was RM700K.
• As the CV<RA, the plant would be not
impaired but measured at CV (RM550K) and
continue to be depreciated.

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 Presentation in SFP
• Non-current assets HFS and assets of disposal group to
be disclosed separately from other assets.
• Liabilities of disposal group to be disclosed separately
from other liabilities.
• Assets and liabilities of disposal group are not to be
offset or netted.
• Major classes of assets and liabilities can be disclosed
either on the face of SFP or in the notes.
Illustrations 1 and 2 of text book

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 Statement of financial position (extract)
Non-current assets RM mil RM mil
PPE 100.0
Current assets
Inventory 10.0
Cash at bank 5.0 15.0
115.0
Held-for-sale asset 3.5
Total assets 118.5

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 Illustration: a disposal group
• An entity has previously revalued a non-
current asset which is now classified as HFS.
The surplus remaining in the ARR relating to
the asset is RM550,000. The disposal group
comprises:
– PPE RM1.2 mil
– Inventory RM0.24 mil 1.14m
– Liabilities(RM0.3 mil)

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 Statement of financial position
Non-current assets: RM’000 RM’000
PPE Xxx
Current assets: Xxx
Inventory Xxx
Cash at bank Xxx
Xxx
Assets of disposal group 1,440
Total assets Xxx

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 Statement of financial position
Equity and liabilities RM’000 RM’000
Share capital Xxx
Reserves Xxx
Reserve relating to disposal group 550 Xxx
Xxx
Non-current liabilities Xxx
Current liabilities Xxx
Xxx
Liabilities relating to disposal group 300
Total equity and liabilities xxx

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 Discontinued Operations
• A D.O. is a component of an entity that has either
been disposed of, or classified as HFS, and
– Represents a separate major line of business or
geographical area of operation; or
– Part of a single coordinated plan to dispose of a major line
of business or geographical area of operation; or
– Subsidiary acquired exclusively with view to resell.
The component has to be a CGU or a group of CGU.
Example 15 of text book
Timing of classification as a D.O.:
When the D.O. meets the criteria of ‘held for sale’.

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 Example 15
• An entity operates a hotel business and
property development. If it disposes of a
single hotel, the disposal may not constitute a
discontinued operation.
• If it disposes of its hotel business in China,
then the disposal can be treated as a
discontinued operation based on geographical
segment.

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 Disclosure
• In the SCI - single amount comprising of the total of:
• Profit after tax from D.O.
• Post-tax gain/loss on measurement of assets to FV or
sale of assets constituting the D.O.
• Analysis of the above single amount in SCI into the
following:
• Revenue, expenses and pre-tax profit/loss
• Related income tax
• Gain/loss on measurement to FV or on sale of assets of
D.O. and related income tax.
• Illustration 3 and Example 16 of text book

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 QUIZ
On 1 December x4, a piece of land of Grey had a
carrying amount of RM25 million, but its recoverable
amount was RM24 million. On re-classification as HFS,
the FVLCD was RM23 million.
On 1 March x5, the FVLCD was:
a. RM24 millionb. RM25.5 million

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 Solution
First it has to be written down to RM24 million due to
impairment. On re-classification as HFS it will be
measured at RM23 million (more impairment).
a. On 1 March there is a reversal of impairment and it
will be measured at RM24 million. The ‘gain’ of RM1
million is taken to profit or loss.
b. On 1 March there is a reversal of impairment and it
will be measured at RM24 million (and not 25.5m)
which is the carrying amount immediately before
being classified as HFS.
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 Summary
• MFRS5 requires non-current assets and groups
of assets that are HFS to be presented
separately on the face of the SFP.

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 Summary
• To qualify as HFS:
– The asset or disposal group should be available for
immediate sale in the present condition;
– The sale must be probable;
– Management must be committed to the plan to
sell the asset and there is an active effort to locate
a buyer;
– The asking price must be reasonable; and
– Sale is expected to take place within 12 months

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 Summary
Measurement
• These assets are measured at the lower of CV
and FVLCD. They should not be depreciated.

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 Summary
Discontinued operations
• D.O. must be presented separately in the SCI.
The following info must be disclosed for a
D.O.:
• As a single amount on the face of the SCI:
• The post-tax profit/loss of the D.O.; and
• The post-tax gain or loss recognised on the
measurement to FVLCD or on the disposal of the assets.

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 Summary
Discontinued operations
• An analysis of the single amount into:
– The revenue, expense and pre-tax profit or loss of
the D.O.;
– The related income tax expense; and
– The gain or loss on the remeasurement to FVLCD
or on the disposal of the assets.

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 Summary of MFRS 5
• A D.O. represents a separate major line of
business or geographical area of operation. It is
part of a single coordinated plan to dispose of
a separate major line of business or
geographical area of operations. It also
includes subsidiary acquired exclusively with a
view to resale.
• Results of D.O. are to be presented as a single
amount in the SOPL
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 Summary of MFRS 5
• Timing of classification of an operation as a
D.O. – When the D.O. meets the criteria of
HFS.
• Non-current assets HFS are measured at the
lower of CV and FVLCD. They are non-
depreciable. Impairment loss occurs when the
CV exceeds FVLCD.

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 Summary
• Review chapter summary on pages 127 – 128
• Question and answer session

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