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Wiley IFRS: Practical Implementation Guide and Workbook
Lynch also has equipment that it recently had leased to third parties. At July 3 1, 20X5, there was $5 mil–
lion (carrying value) of this equipm ent, and at July 3 1, 20X6, there was an additional $8 million (carry–
ing value) of this equipment. The leases had expired at the respectiv e dates but no decision had been
made as to whether to refurbish and sell the equipment or to abandon it. The entity subsequently refur–
bished both sets of equipment and sold them on December I, 20X5, for $ 10 million and on Decem–
ber 15, ZOX6, for $ 16 million . The refurbishment costs were $Z million and $3 million respectively for
the two sets of assets .
Required
Discuss the treatment of the above elements in the financial statements as of Jul y 3 1, 20X5, and July 31,
ZOX6.
Solution
Under IFRS 5, an entity should classify a disposal group, which Pin is, as held for sale if its carryi ng
amount will be recovered principally through a sales transaction rather than through continuing use. The
basic criteria to be met are that: there must be a commitment to a plan to sell the asset, an active program
to locate a buyer and complete the plan must have been initiated, the asset must be actively marketed at a
reasonable price in relation to its fair value, the sale should be expected to occur within one year, and it
would appear that significant changes to the plan are unlikely. In this situation, the entity has approved
the plan prior to the year-end and the sale is expected to be completed within IZ months, on Septem–
ber I, 20X5. By the time the financial statements were approved, the entity was in negotiation for the
sale of Pin, so it would appear that the entity is actively trying to find a buyer and that the sale is highly
probable. Additionall y, if the entity is in negotiation for the sale, then the asset would appear to be
actively marketed. Finally, there does not appear to be any intention to change the plan of sale
significantly; therefore, the disposal group would appear as if it is held for sale.
Before classification of the item as held for sale, an impairmen t review will have to be undertaken. In
this case, there is indica tion of possible impairment in any event because the subsidiary is making a loss
in the postacquisition period. Any loss arising on the impairment review will be charged to profit or loss.
An item that is held for sale should be reported at the lower of carryi ng value and fair value less costs to
sell. An impairment calculation will have to be carried out as of July 31, 20X5 , before Pin can be mea–
sured in the balance sheet. The value in use of Pin at August 16, 20X5, is estimated at $8 million. The
loss up to that date is $3 million. Therefore, the value in use at July 3 1 will be $8 million plus $3 million,
or $ 11 million. The net realizable value of Pin will be $9 million less the costs of selling it of $1 million,
or $8 million. The recoverable amount is the higher of the net realizable value and the value in use.
Therefore, in any impairment test at year-end, the value in use of $11 million would be used.
However, because the disposal group has been classified as held for sale, any impairment loss will be
calculated by reference to different criteria. That is, any disposal group that is classified as held for sale
should be measured at the lower of carrying amount and fair value less costs to sell. In this case, the fair
value less cost to sell will be $8 million. Therefore, an impairment loss of $7 million will be recognized
in profit or loss.
Regarding the administrative headquart ers, the noncurrent assets will qualify as held for sale if they are
available for immediate sale in their present condition subjec t to the usual selling terms. However, as of
July 31, 20X5, the administrative buildin g could not be sold because of the environmental contamina–
tion. Therefore, it would simply be shown at carrying value within the financia l statements. The entity
has the intent and the ability to sell the asset, but it would be unlikely to find a buyer while this contami–
nation was present. It does not appear there is any impairment of the carrying value of the building due
to the contamination; the building' s carryi ng value is $3 million and the market value was $4 million be–
fore estimated selling costs of $500,000. In rectifying the environmental contamination, the cost was
only $50,000, and therefore it does not seem that the value of the building is impaired.
In the year to July 31, 20X6, the propert y has been offered for sale at a price of $4 million. The market is
in decline, and by year-end a buyer had not been found. The market price at that date was much less than
the offer price, and the entity has refused to reduce the selling price of the property. The property has
been vacated ; therefore, it is available for sale, but because the price is not reasonable in relation to its
current fair value-$4 million as opposed to $3.5 million-then the entity's intention to sell the asset
might appear be questionable. The property fails the test in [FRS 5 regarding the reasonableness of price
and, therefore, should not be classified as held for sale. If the property had been classified as held for
sale at July 31, 20X6, then it would have had to be carried at the lower of the carrying value and fair
value less costs
to
sell. This would have meant that the carryi ng value of $2.8 million would have been
compared with the fair value of $3.3 million less the costs of $600,000, or $2.7 million, and there would
have been the need to write down the value of the asset by $ 100,000. To qualify for classification as held