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  • Non-Current Asset Held For Sale - Notes

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    MARCUAP Flora Mel Joy H.
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    The document discusses accounting for non-current assets held for sale. Key points include: - A non-current asset is classified as held for sale if its carrying amount will be recovered principally through sale rather than continuing use. It must be available for sale and the sale must be highly probable. - Assets held for sale are measured at the lower of carrying amount or fair value less costs to sell. They are not depreciated. Write-downs to fair value less costs to sell are recognized as impairment losses. - If an asset no longer meets the criteria to be classified as held for sale, it is remeasured at the lower of its carrying amount before classification or its recoverable amount.

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    Non-Current Asset Held for Sale - Notes

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    The document discusses accounting for non-current assets held for sale. Key points include: - A non-current asset is classified as held for sale if its carrying amount will be recovered principally through sale rather than continuing use. It must be available for sale and the sale must be highly probable. - Assets held for sale are measured at the lower of carrying amount or fair value less costs to sell. They are not depreciated. Write-downs to fair value less costs to sell are recognized as impairment losses. - If an asset no longer meets the criteria to be classified as held for sale, it is remeasured at the lower of its carrying amount before classification or its recoverable amount.

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    38 views4 pages

    Non-Current Asset Held For Sale - Notes

    Uploaded by

    MARCUAP Flora Mel Joy H.
    The document discusses accounting for non-current assets held for sale. Key points include: - A non-current asset is classified as held for sale if its carrying amount will be recovered principally through sale rather than continuing use. It must be available for sale and the sale must be highly probable. - Assets held for sale are measured at the lower of carrying amount or fair value less costs to sell. They are not depreciated. Write-downs to fair value less costs to sell are recognized as impairment losses. - If an asset no longer meets the criteria to be classified as held for sale, it is remeasured at the lower of its carrying amount before classification or its recoverable amount.

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    of 4

    Non-Current Asset Held for Sale

    Technical Knowledge
    - To understand the recognition of noncurrent asset held for sale
    - To know the conditions for the classification of a noncurrent asset held for sale
    - To know the measurement and presentation of noncurrent asset held for sale
    - To know the recognition of a noncurrent asset that ceases to be classified as held for sale

    A non-current asset is an asset that does not meet the definition of a current asset.

    The non-current asset may be an individual asset, like land and building, or a disposal group.

    Disposal Group
    - 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
    - The group includes goodwill acquired in a business combination if the group is a cash generating unit to which goodwill
    has been allocated
    - A non-current asset or disposal group is classified as held for sale if the carrying amount will be recovered principally
    through a sale transaction rather than through continuing use

    Conditions for Classification as Held for Sale


    - A non-current asset or disposal group shall be classified as held for sale if the following conditions are present:
    1. The asset or disposal group is available for immediate sale in the present condition subject only to terms that are usual
    and customary for sale of such assets or disposal group
    2. The sale must be highly probable

    Definition of Highly Probable


    - For the sale to be highly probable, the following conditions must be met:
    1. Management must be committed to a plan to sell the asset or disposal group
    2. An active program to locate a buyer and complete the plan must have been initiated
    3. The sale is expected to be a “completed sale” within one year from the date of classification as held for sale
    - An extension of the one-year period does not preclude the asset or disposal group from being classified as held for sale if
    the delay is caused by events or circumstances beyond the entity’s control and there is sufficient evidence that the entity
    remains committed to the plan to sell the asset or disposal group
    4. The asset or disposal group must be actively marketed for sale at a sale price that is reasonable in relation to the fair
    value
    5. Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or
    withdrawn

    Measurement of Asset Held for Sale


    - An entity shall measure a non-current asset or disposal group classified as held for sale at lower of:
    a. Carrying amount or
    b. Fair value less cost of disposal

    Fair Value
    - The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
    participants at the measurement date

    Cost of Disposal
    - The incremental cost directly attributable to the disposal of an asset or disposal group but excluding finance cost and
    income tax expense

    A non-current asset classified as held for sale shall not be depreciated.

    Write-down to Fair Value less Cost of Disposal


    - If the fair value less cost of disposal is lower than carrying amount of the asset or disposal group, the write-down to fair
    value less cost of disposal is treated as an impairment loss.
    - If the non-current asset is a disposal group, the impairment loss is apportioned across the assets. Any goodwill is written
    off first and any remainder of the impairment loss is allocated prorate to the non-current assets based on carrying amount.
    Subsequent Increase in Fair Value
    - If subsequently there is an increase in the fair value less cost of disposal, an entity shall recognize a gain but not in
    excess of any impairment loss previously recognized.

    Illustrative Problem 1
    On January 1, 2017, an entity acquired an equipment at a cost of 2,500,000 to be used in the ordinary course of business.
    The equipment has an estimated useful life of 10 years and a residual value of 250,000.

    On January 1, 2020, the equipment was classified as held for sale. On such date, the fair value less cost of disposal was
    estimated at 950,000. On June 30, 2020, the equipment was sold for 750,000.

    Journal Entries
    January 1, 2020
    Equipment held for sale 1,825,000
    Accumulated depreciation 675,000 (2,500,000 – 250,000) / 10 x 3
    Equipment 2,500,000
    June 30, 2020
    Impairment loss 875,000 Cash 750,000
    Equipment held for sale 875,000 Loss on sale of equipment 200,000
    (1,825,000 – 950,000 = 875,000) Equipment held for sale 950,000

    Illustrative Problem 2
    On January 1, 2019, an entity acquired an equipment at a cost of 2,000,000 to be used in the ordinary course of business.
    The equipment has an estimated useful life of 5 years and has no residual value.

    On December 31, 2020, the equipment was classified as held for sale. On such date, the fair value less cost of disposal
    was 1,500,000. On July 1, 2021, the equipment was sold for 1,450,000.

    Journal Entries
    December 31, 2020
    Equipment held for sale 1,200,000
    Accumulated depreciation 800,000 (2,000,000 / 5 x 2)
    Equipment 2,000,000

    CA of 1.2M vs. FV less CD of 1.5M


    Measured at lower amount

    July 1, 2021
    Cash 1,450,000
    Equipment held for sale 1,200,000
    Gain on sale of equipment 250,000

    Revalued Asset Classified as Held for Sale


    - When an entity adopts the revaluation model for the measurement of assets, any asset classified as held for sale should
    be revalued to fair value immediately prior to the classification as held for sale
    - The additional revaluation surplus is equal to the fair value at the classification date less the carrying amount at that date
    - Any cost of disposal at classification date should be recognized as impairment loss for the period and deducted from the
    asset held for sale
    - At subsequent year-end, the revalued asset classified as held for sale shall be measured at the lower of carrying amount
    and fair value less cost of disposal

    Illustrative Problem 3
    On January 1, 2019, an entity acquired land at a cost of 1,250,000. The land is measured at fair value in accordance with
    the revaluation model. On December 31, 2019, the fair value of the land was 1,500,000.

    On June 30, 2020, the land was classified as held for sale. On such date, the fair value was estimated at 1,750,000 and the
    cost of disposal at 50,000. On December 31, 2020, the land was sold for 1,675,000.
    Journal Entries
    January 1, 2019 December 31, 2019
    Land 1,250,000 Land 250,000
    Cash 1,250,000 Revaluation Surplus 250,000

    June 30, 2020


    Land 250,000 Land Held for Sale 1,750,000
    Revaluation Surplus 250,000 Land 1,750,000
    *Use the fair value only. Impairment Loss 50,000
    Land Held for Sale 50,000
    December 31, 2020
    Cash 1,675,000 Revaluation Surplus 500,000
    Loss on Sale of Land 25,000 Retained Earnings 500,000
    Land Held for Sale 1,700,000

    Abandoned Non-Current Asset


    - An entity shall not classify as held for sale a non-current asset or disposal group that is to be abandoned
    - This is because the carrying amount will be recovered principally through continuing use or the non-current asset is to be
    used until the end of its economic life

    Temporarily Abandoned
    - An entity shall not account for a non-current asset that has been temporarily taken out of use as if it had been abandoned.
    - An entity ceases to use a manufacturing plant because demand for its product has declined.
    - However, the plant is maintained in workable condition and it is expected that it will be brought back into use if demand
    picks up. In this case, the plant is not regarded as abandoned.

    Change in Classification
    - Circumstances could arise leading to the non-current asset no longer being classified as held for sale.
    - For example, there is a decision not to sell the non-current asset or the criteria for being classified as held for sale may
    no longer be met.
    - In such as case, the entity shall measure the non-current asset that ceases to be classified as held for sale at the lower of:
    a. Carrying amount before the asset was classified as held for sale adjusted for any depreciation or amortization that
    would have been recognized if the asset had not been classified as held for sale
    b. Recoverable amount at the date of the subsequent decision not to sell

    Any adjustment to the carrying amount of a non-current asset that ceases to be classified as held for sale should be
    included in profit or loss.

    Illustrative Problem 4
    An entity purchased equipment for 2,500,000 on January 1, 2019 with a useful of 10 years and no residual value. On
    December 31, 2020, the entity classified the asset as held for sale. The fair value of the equipment on December 31, 2020
    is 1,650,000 and the cost of disposal is 50,000. On December 31, 2021, the fair value of the equipment is 1,900,000 and
    the cost of disposal is 100,000. On same date, the entity believed that the criteria for classification as held for sale can no
    longer be met. Accordingly, the entity decided not to sell the asset but to continue to use it.

    Journal Entries
    January 1, 2019 December 31, 2019
    Equipment 2,500,000 Depreciation Expense 250,000
    Cash 2,500,000 Accumulated Depreciation 250,000

    December 31, 2020


    Depreciation Expense 250,000 Equipment Held for Sale 2,000,000
    Accumulated Depreciation 250,000 Accumulated Depreciation 500,000
    Equipment 2,500,000
    Impairment Loss 400,000
    Equipment Held for Sale 400,000
    2,000,000 – (1,650,000 – 50,000)
    December 31, 2021
    Carrying amount had not been classified as held for sale
    2,500,000 / 10 x 3 = 750,000 Equipment Held for Sale 150,000
    2,500,000 – 750,000 = 1,750,000 Gain on Reclassification 150,000
    Recoverable Amount (1,900,000 – 100,000 = 1,800,000)
    Equipment 1,750,000
    Measurement of Equipment (Lower) 1,750,000 Equipment Held for Sale 1,750,000
    Carrying Amount per Book 1,600,000
    Gain on Reclassification 150,000

    Presentation of Asset Classified as Held for Sale


    - Assets classified as non-current shall not be reclassified as current until they meet the criteria to be classified as held for
    sale
    - A non-current asset that is already classified as held for sale shall be presented separately as current asset
    - If the non-current asset is a disposal group classified as held for sale, the assets and liabilities of the group shall be
    presented separately and cannot be offset as a single amount
    - The liabilities of the disposal group shall be described as “liabilities directly associated with non-current assets classified
    as held for sale” presented separately as a single amount under current liabilities

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