What are Assets Held-For-Sale?
Assets held-for-sale are non-current (or long-lived) assets, which a company plans to sell. The process of selling of assets can be complex and take time. This is particularly true for specialized assets for which suitable buyers may take a long time to find. During this time, the assets are not used for the operation of the business and are not generating any revenue.
The accounting treatment of assets held-for-sale is consistent under both IFRS and US GAAP and these rules require companies to classify a non-current asset as held for sale if its carrying amount will be recovered by selling the asset and not from its continuous use.
In some cases, a company may want to sell a group of assets, for example a single business unit of a large company, in a single transaction. Such a group of assets is called a disposal group and the disposal group will include all the assets and liabilities of this business unit. Disposal groups are treated in the same way as a single asset held-for-sale for reporting purposes.
Key Learning Points
- Assets held-for-sale are non-current (or long-lived) assets, which a company plans to sell
- If a company wants to sell a group of assets in a single transaction, such a group is called a disposal group
- There are six criteria for assets to qualify as held-for-sale
- Assets held for sale are reported at the lower of the carrying amount and fair value less costs to sell. Such assets are not depreciated.
Criteria for Held for Sale Accounting
For an asset to be classified as held-for-sale it needs to meet the following criteria:
- Management commits to a plan to sell the asset (e.g., identifying the asset, setting an expected date of completion, etc.)
- The asset is available for sale in its present condition
- Management has initiated an active program to locate a buyer (e.g. marketing or initiating discussions with third parties)
- The sale is probable and is expected to close within 1 year
- The selling price is reasonable in relation to the asset’s current fair value
- It is unlikely there will be any changes in or withdrawal of the plan to sell the asset
Accounting Treatment of Assets Held for Sale
both require measuring assets held for sale at the lower of the carrying amount and fair value less costs to sell.
The carrying value is calculated as original cost less accumulated depreciation (for physical assets) or less amortization expense (for intangible assets, such as patents). For example, an asset has been purchased at $20,000 and has accumulated depreciation of $9,000. Its carrying amount or carrying value will be $11,000 (20,000-9,000).
The fair value of the asset is the estimated worth of the asset in the market. Suppose the fair value of the asset mentioned above is $12,000, and the cost to sell this asset is around $3,000. In such cases, the fair value less cost to sell works out to $9,000. In this example, the asset held for sale will be shown in the balance sheet at a value of$9,000.
Once an asset is held for sale, it is no longer depreciated.
Finding Assets Held-For-Sale in Financial Statements
Both IFRS and US GAAP require assets held for sale to be presented separately in the financial statements. These can be reported either in the statement of financial position (the balance sheet) or in the notes to financial statements. Here is a snapshot from the 2017 Annual report of the Coca-Cola Company. The company reports assets held for sale for 2016 and 2017.
The Coca-Cola Company – Extract from Balance Sheet 2017
Difference between Assets Held for Sale and Discontinued Operations
Discontinued operations refer to a part of a company’s operations (such as a business unit or a product line) that has either been disposed of or classified as held for sale. Additionally, for an asset to qualify as discontinued operations, it has to meet the following criteria:
- Represents either a major line of business (e.g., a business unit) or a geographical area of operations (e.g., a key market)
- Is part of a plan to dispose of the asset, or
- The subsidiary has been acquired exclusively with a view to resale and the disposal involves a loss of control by the parent organization.
Accounting standards require discontinued operations to be presented separately in the financial statements. This allows a realistic and fair assessment of the company’s future financial results. The post-tax profit/loss of the discontinued operations is added to any post-tax gain/loss on disposal. The sum is shown as a single amount in the income statement. Separately, a break-up of the two amounts should be included either on the face of the income statement or in the notes to the financial statements.