Background
The objective of the overall convergence project is to eliminate a variety of differences between International Financial Reporting Standards and US GAAP. The project, which is being done jointly by FASB and IASB, grew out of an agreement reached by the two boards in September 2002.
Click here for general information about the Convergence Project.
Discussion at the July 2002 IASB Meeting
IAS 35, Discontinuing Operations
The Board discussed three possible areas for converging IAS 35, Discontinuing Operations, and FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets:
(1) IAS 35 makes no distinction between operations that are disposed of by sale and those disposed of otherwise (for example, by abandonment). Under SFAS 144, however, an operation that is abandoned cannot be reported as discontinued until it is abandoned whereas an operation that is held for sale can be reported as discontinued prior to disposal. The distinction under SFAS 144 arises due to the different measurement basis of assets classified as held for sale vs. those held and used.
(2) The criteria for the "initial disclosure event" in IAS 35 are similar to those in IAS 37 for the purpose of recognising a restructuring provision. The possible amendment to IAS 35 for (1) above might result in a restructuring provision that relates on an operation that will eventually be classified as discontinued being initially recognised in continuing operations and subsequently reported as part of discontinued operations. The Board discussed whether it would need to amend IAS 37 if it converges with SFAS 144.
(3) SFAS 144 sets out how operations classified as discontinued should be reported. The Board discussed possible amendments it might make to the disclosure requirements of IAS 35 in the light of both SFAS 144 and the IASB's performance reporting project.
Issues relating to impairment will not be included in the IAS 35 convergence project.
Discussion at the May 2003 IASB Meeting
The Board discussed various issues related to this project and agreed:
- Not to replace the term 'held for sale' with 'retired from active use'.
- To include in the scope of the ED:
- intangible assets,
- assets held by entities in extractive industries,
- long term customer relationships,
- insurance contracts, and
- associates.
- To use the definition of a 'discontinued operation' as per FAS 144 but to specifically request comment on this in the ED
- To use the term 'highly probable' instead of 'likely'
FAS 144 removed the exception from consolidation for entities for which control is intended, at acquisition, to be temporary. The exemption exists in IAS 27. The Board noted that if this exemption were removed from IAS 27, the effect would be that groups of assets may only be deconsolidated if they meet the criterion of being held for disposal. The Board decided to propose removing this exemption from IAS 27 in the Exposure Draft.
The Board noted that there would be a measurement difference between the Exposure Draft and FAS 144 in that the Exposure Draft would not reduce the fair value by costs expected to be incurred to sell the assets. The Board decided to converge with US GAAP on the recognition criteria and to hold the measurement issue to Business Combinations Phase II.
July 2003: Exposure Draft ED 4
On 24 July 2003, the IASB issued ED 4, Disposal of Non-Current Assets and Reporting of Discontinued Operations. Comment deadline ended 24 October 2003. We have prepared a Special Global Edition of our IASPlus Newsletter (PDF 40k) summarising the proposals in the exposure draft. ED 4 is part of the short-term convergence project being undertaken jointly by the IASB and the FASB. The proposals in ED 4 would achieve substantial convergence of IFRS with the requirements of US SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, with respect to:
- classifying, measuring, and presenting assets held for sale, and
- classifying and presenting discontinued operations.
ED 4 does not address impairment of long-lived assets that are not being disposed of, which is covered by IAS 36, Impairment of Assets. The impairment recognition and measurement standards in SFAS 144 are significantly different from those in IAS 36, but those differences are not being addressed in the short-term convergence project. Click for IASB Press Release (PDF 35k).
Discussion of ED 4 at the IASB's December 2003 Meeting
The Board considered comments arising from the exposure draft. The staff noted that some commentators believed the project was not essential to 2005 and need not be completed by March 2004. The Board disagreed and agreed to proceed with the project. The Board reiterated that this was part of the convergence project and that comments should be considered mindful of the objectives of the convergence project. The Board discussed the comment that the focus of the project should be assets retired from active use but agreed to retain the current focus. The Board also agreed to not deal with provisioning consequences of abandoned assets as part of this project but that the topic should be dealt with as part of considerations of IAS 37.
Classification of assets held for sale
The staff recommended that the criterion that the sale should be expected to be completed within a year should be removed, and therefore also the exceptions to that criterion, on the grounds that such a criterion is not needed under (and indeed in some cases might be inconsistent with) the principle that the sale must be highly probable. The staff proposed the following wording in paragraphs 4 and 5:
4. An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset (or disposal group) must be available for sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable.
5. Indications that a sale is not highly probable include:
(a) no commitment from management to a plan to sell
(b) no active programme to locate a buyer and other actions required to complete the plan to sell the asset (or disposal group)has been initiated
(c) the asset (or disposal group)is not being actively marketed for sale at a price that is reasonable in relation to its current fair value
(d) actions required to complete the plan indicate that it is likely that significant changes to the plan will be made or that the plan will be withdrawn."
The Board expressed concern that this would allow entities to classify any asset to be included in this category and believed the reference to 12 months should be reinstated. They believed that there could be exceptions to this such as regulatory approval and examples of such exceptions should be included. The Board believed this could be expressed as a principle with guidance as to how it should be applied.
Measurement of Assets
The staff noted that many commentators did not agree with the measurement proposals in ED 4. The staff believed that these commentators did not understand that the results of these proposals were similar to what would result from applying the revised IAS 16 and 36.
The staff recommended that the proposals in ED 4 in this area be retained. The Board agreed.
Disposal Groups
The staff recommended that the following amendments be made in this area:
(a) the relationship between disposal groups and cash-generating units should be clarified,
(b) the interaction between the scope of ED 4 and the application of the requirements to disposal groups should be clarified,
(c) impairment of any goodwill allocated to a disposal group should not be calculated separately but that the allocation of the impairment loss of the disposal group as a whole should be allocated first to goodwill, consistent with IAS 36,and
(d) the allocation of any remaining impairment loss should be allocated pro-rata to all the assets in the disposal group, consistent with IAS 36.
The Board agreed with a, b and d above but believed c was not necessary.
Commercial Substance
The staff proposed that the standard include wording that states it does not apply to exchanges of assets without commercial substance as detailed in the revised IAS 16. The Board agreed but stated that this should be cross-referenced to IAS 16.
Newly Acquired Assets
The staff recommended adding the following words in this area:
If a newly acquired asset (or disposal group) meets the criteria to be classified as held for sale (see paragraph B3 of Appendix B), it shall be measured on initial recognition at the lower of cost and fair value less costs to sell, unless the asset (or disposal group) acquired is part of a business combination, in which case it shall be measured on initial recognition at fair value less costs to sell.
The Board agreed.
Discussion of ED 4 at the IASB's January 2004 Meeting
The Board continued its deliberations of ED 4 by addressing issues raised in the comment letters on question 5-9 in the Exposure Draft.
Question 5 asked for comments on the proposed accounting for impairment losses arising from revalued assets. The Board retained its requirements in ED 4 that revaluation decreases (and revaluation increases) should be accounted for in accordance with the standard under which the assets were revalued upon initial classification as held for disposal. The change in valuation related to the recognition of costs to sell should be included in profit or loss for the period.
The Board decided that the measurement of current and non-current assets under IAS 40, Investment Property, and IAS 41, Agriculture, would continue under those standards. That is, if an asset is accounted for at fair value under IAS 40 or IAS 41, it would be outside of the scope of ED 4 if held for sale as an individual item. Non-current assets previously accounted for under IAS 40 and IAS 41 would, however, be within the scope of ED 4 if part of a disposal group.
Question 6 of the Exposure Draft asked for comments on the proposed removal of the exemption from consolidation for subsidiaries acquired and held exclusively with a view to resale. The Board confirmed the decision in ED 4 to remove this exemption. Several members of the Board were clearly concerned about practicability issues and suggested a single line item be presented on the balance sheet that would be marked to market (therefore avoiding a requirement to assign fair values in the purchase price allocation). In the end, the Board noted that this project was on the agenda as a convergence project and that a consistent approach with FAS 144 was desired.
Regarding Question 7, the Board reaffirmed that assets and liabilities of the disposal group should be presented separately on the balance sheet. Additionally, items representing revenue, expenses, pre-tax profit and loss and tax of the operations held for disposal (along with any gain or loss on remeasurement) shall be presented.
Question 8 asked for comments on the criteria for when a component of an entity should be classified as a discontinued operation. The Board noted serious concern over the proposal in the Exposure Draft as a result of comments received. For example, the Board was comfortable that a men's clothing store that decided not to sell shoes anymore would have a discontinued operation. However, the Board was not comfortable with the fact that the current wording in ED 4 would require the sale of an investment property by a Real Estate Investment Trust (REIT) to be classified as a discontinued operation. A company (such as a REIT) that buys and sells items as part of its primary business would then have a discontinued operation every year. Additionally, the requirement to restate prior periods for the discontinued operation would render the comparative period continuously invaluable.
The Board is concerned about this issue and suggested further work be done in this area before a final standard could be issued. The Board noted the EITF is addressing this issue. However, some Board members noted that if this issue cannot be solved, they would view ED 4 as not operational. The Board will address this further at its February meeting.
Question 9 addressed the presentation of discontinued operations in the income statement. The Board concluded that it would not require that revenue, expenses, pre-tax profit or loss, and any related tax expense be separately presented on the face of the income statement. If a single item (net of tax expense) is presented on the face of the income statement for discontinued operations, separate presentation of revenue, expenses, pre-tax profit or loss, and related tax expense is required in the notes to the financial statements.
The Board discussed some concerns over whether the application of IAS 8 on the transition to the proposed standard would be operational. The Board decided to clarify that retrospective application would be allowed only when the information to comply already exists. This wording would incorporate aspects of the definition of impracticability in the revised IAS 8 and the wording in ED 2 on the retrospective application of that standard to share-based payments prior to the effective date.
The Board also confirmed that assets from insurance contracts (such as deferred acquisition costs) would be within the scope of ED 4.
Discussion of ED 4 at the IASB's February 2004 Meeting
Definition of Discontinued Operations
The staff noted that the majority of commentators disagreed with the proposed definition and were concerned as to relatively small units being classified as discontinued and discontinuing operations being presented every year.
The staff proposed that the current definition in IAS 35 be used but that the timing of the classification be retained as being consistent with the timing of the classification of assets as held for sale.
After considerable discussion the Board considered whether to delay any amendments until the FASB or EITF has completed deliberations on any amendments. This was not accepted (9-5).
The Board then agreed to adopt the staff recommendation but to continue working on the definition of a discontinued operation with a view to converging in a subsequent amendment.
Current/Non-current Classification of Assets (and Disposal Groups) Held for Sale
To address certain commentators' concerns the staff recommended that, for the purposes of this standard only, the definition of non-current assets should be modified, as follows:
- for entities that use a current/non-current balance sheet presentation: assets that, until their final year of use, the entity would classify as non-current in the absence of a specific decision to sell; and
- for entities that use a liquidity presentation: assets that, until their last year of use, would, in the absence of a specific decision to sell, include amounts expected to be recovered more than twelve months after the balance sheet date.
The Board did not support the staff's proposal but requested that the staff provide further clarification that non-current assets would only be classified as current if they meet the held-for-sale classification.
The Board noted that they did not believe that non-current assets in their final year of use or the next years depreciation should be classified as current under the realised within 12 months or consumed within the operating cycle.
Associates and Joint Ventures
The staff noted the decision in January that assets should only be excluded from the scope of the measurement provisions if:
- they are already marked to market; or
- there would be difficulties in determining their fair value less costs to sell.
It was further noted that this would not apply to investments in associates and joint ventures in consolidated financial statements (except for those acquired and held exclusively for resale, which are accounted for under IAS 39).
The staff, therefore, recommended:
- that investments in associates and joint ventures in consolidated financial statements should continue to be included in the scope of the IFRS;
- the requirements relating to associates and joint ventures acquired and held exclusively for resale should be deleted from IASs 28 and 31; and
- requirements for associates and joint ventures that meet the criteria to be classified as held for sale to be treated in accordance with the standard should be added to IASs 28 and 31.
The Board agreed but requested the staff to add examples clarifying that the underlying assets and liabilities would be valued in accordance with this standard.
Discussion of ED 4 at the March 2004 IASB Meeting
The Board considered one final issue in relation to a draft of a final standard on Non-current Assets Held for Sale and Discontinued Operations. In February the Board agreed to remove from IAS 27 the exemption from consolidation for subsidiaries acquired with a view to immediate disposal and to include in the implementation guidance an example illustrating a 'short-cut' method of consolidation. In developing that example staff noted that the method provides the information required to be presented in the income statement and balance sheet, but not the required note disclosures. The Board reaffirmed its decision to remove the exemption from IAS 27, and decided to exempt entities acquired with a view to immediate disposal from a number of the disclosure requirements of the standard.
March 2004: IFRS 5 Issued
In March 2004, the Board issued IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Effective date is 1 January 2005.
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