Chronology
Timetable
Background
The goal of this project is to amplify the definition of a discontinued operation in IFRS 5.
Discussion at the April 2007 IASB Meeting - Agenda Decision
The FASB staff joined the meeting by video link for this session.
The Board discussed whether to separate the definition of a discontinued operation from the Financial Statement Presentation project in order to issue guidance on this topic on an expedited basis.
The FASB staff noted that this issue needs urgent attention in the United States and that the FASB will most likely address this in a separate project.
The Board members were in two camps. Some Board members pointed out that this is mainly an US issue and that the IASB should not do anything at this stage but to continue to issue the guidance as part of the Financial Statement Presentation project. Other Board members raised the concern that the FASB might come to a conclusion differing from the tentatively agreed definition of discontinued operations (the operating segment criterion) and that this might result in changes to the Financial Statement Presentation project.
Finally, by a majority of 9-5, the Board voted in favour of a separate joint project with the FASB.
Discussion at the April 2008 IASB Meeting
The Board discussed potential amendments to IFRS 5 resulting from decisions made by the IASB and FASB in recent joint projects. The following issues were addressed at this meeting:
- Measurement of non-current assets held for sale at fair value rather than at fair value less costs to sell (the 'measurement portion')
- Converged definition of discontinued operations (the 'discontinued operations portion')
Measurement of non-current assets held for sale at fair value rather than at fair value less costs to sell (the 'measurement portion')
In their joint project on business combinations, the Boards decided that all non-current assets held for sale (that is, including those that do not relate to business combinations) should be measured at 'fair value' rather than 'fair value less costs to sell'. However, the Boards decided that an opportunity for constituents to comment on this decision should be provided and, consequently, the revised business combination standards allowed a temporary exception to the measurement principle of fair value until IFRS 5 (and FASB Statement No 144) are amended. The staff pointed out that the main reason for making this amendment was to avoid the recognition of so called 'Day 2 Losses'. Day 2 Losses would occur if non-current assets are measured at fair value on Day 1 of the business combination and measured at fair value less costs to sell in accordance with IFRS 5 on Day 2.
The staff noted that there are three other situations in which the term 'fair value less costs to sell' is used in IFRSs:
- In IAS 2 Inventories, commodity broker-traders are exempted from applying the measurement requirements in IAS 2 if they measure their inventories at fair value less costs to sell.
- In IAS 36 Impairment of Assets, the term recoverable amount is defined as the higher of fair value less costs to sell and value in use.
- In IAS 41 Agriculture, biological assets and agricultural produce are required to be measured at fair value less estimated point-of-sale costs.
The staff summarised the potential issues to be addressed in the measurement portion of the project as follows:
Issue 1: Whether the measurement attribute for non-current assets held for sale should be changed from fair value less costs to sell to fair value.
Issue 2: Whether the scope exception related to commodity broker-traders should be changed from those who measure their inventories at fair value less costs to sell to those who measure their inventories at fair value.
Issue 3: Whether the definition of recoverable amount should be changed from the higher of fair value less costs to sell and value in use to the higher of fair value and value in use.
Issue 4: Whether the measurement attribute for biological assets and agricultural produce should be changed from fair value less estimated point-of-sale costs to fair value.
The Board was then asked to determine the scope of the measurement portion of the project. Some Board members raised the concern that including all issues would require significant staff resources. Other Board members responded that it is important to remove exceptions as soon as possible.
Finally, by majority vote the Board decided to include all four issues in the scope of the measurement portion.
Converged definition of discontinued operations (the 'discontinued operations portion').
At their respective January 2007 Board meetings discussing financial statement presentation, the Boards tentatively decided to converge the definition of discontinued operations. The Boards decided that a discontinued component of an entity would be reported in the discontinued operations section of the financial statements only if that component meets the definition of an operating segment, as defined in IFRS 8 Operating Segments.
Based on that decision, the Boards tentatively agreed to the following converged definition of discontinued operations:
A component of an entity that has been (or will be) disposed of and meets the definition of an operating segment under IFRS 8 would be reported as a discontinued operation on the face of the financial statements.
The Boards also decided at their respective January 2007 Board meetings that an entity would be required to disclose in the notes to the financial statements disaggregated financial information for both (a) a discontinued component of an entity reported as a discontinued operation in the financial statements and (b) a discontinued component of an entity reported in continuing operations because it did not meet the definition of an operating segment.
The Boards tentatively agreed to require the following disclosure for all components of an entity that have been (or will be) disposed of:
- The major classes of revenues and expenses, including impairments, interest, depreciation and amortisation expense, and minority interest.
- The major classes of cash flows (operating, investing, and financing).
- The major classes of assets and liabilities.
- The nature of the disposal activities and the use of the proceeds from the disposal activities.
The Board discussion focussed mainly on whether referring to IFRS 8 in the definition of a discontinued operation would also have consequences for presentation and measurement of discontinued operations. Some Board members noted that in accordance with IFRS 8, information on operating segments does not necessarily need to be based on IFRSs, and that some of the disclosures may not be presented in the segment reporting.
The Board had a thorough discussion of this issue and finally seemed to reach a consensus that the objectives of IFRS 5 and IFRS 8 are fundamentally different. Consequently, the Board decided:
- to look at IFRS 8 when determining whether a component of the entity constitutes a discontinued operation; and
- to look at IFRS 5 only regarding presentation and measurement of discontinued operations.
By majority votes, the Board reaffirmed the decisions made in January 2007 and asked the staff proceed with the discontinued operations portion of the project.
The Board agreed that the amendments to IFRS 5 related to discontinued operations should be applied prospectively with one exception: The amount presented on the face of the statement of comprehensive income in accordance with paragraph 33(a) of IFRS 5 should be restated based on the revised definition of discontinued operations for all periods presented. If an entity reclassifies its amounts reported in prior periods, it should disclose that fact and the amounts reclassified.
The Board also decided that disclosures related to components of an entity that have been (or will be) disposed of should not be required for subsidiaries acquired and held exclusively with a view to resale.
Other issues
The Board agreed that this project does not need to go through the formal agenda decision process because it was spun off from existing projects.
The Board agreed that the comment period of the exposure draft should be 120 days and asked the staff to prepare a pre-ballot draft of the exposure draft.
Discussion at the June 2008 IASB Meeting
This session was intended to discuss sweep issues arising from Board members' review of the pre-ballot draft of proposed amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and the discussions at the FASB meeting at 14 May 2008 on potential changes to SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The goal of this project is to amplify the definition of a discontinued operation in IFRS 5.
Two issues were discussed at this meeting:
- Issue 1: Subsidiaries that meet the criteria to be classified as held for sale on acquisition
- Presentation on the statement of comprehensive income
- Disclosure exemptions.
- Issue 2: Disclosures for all components of an entity that either have been disposed of or are classified as held for sale
- Unit of disclosure
- Use of proceeds from disposal activities.
Subsidiaries that meet the criteria to be classified as held for sale on acquisition
Presentation on the statement of comprehensive income
Regarding the first part of issue 1, the staff asked the Board if it would agree to a change in the definition of a discontinued operation. The staff informed the Board that the FASB intended to include bundles of asset in that definition. This would result in removing the floor of an operating segment as defined by IFRS 8 if it is not a subsidiary. The Board discussed the pros and cons of extending the definition proposed by the FASB. While there seemed to be some consensus for the idea, once the staff clarified that FASB plans to take this approach to scenarios outside a business combination, but to acquisitions in a broader context, the Chairman proposed that this is not a sweep issue anymore as these are new facts the Board would have to vote on. The staff was asked to bring this particular issue back at a later point.
Disclosure exemptions
The staff asked the Board if discontinued operations should still be provided with exemptions for both the discontinued operations and business combinations disclosure requirements.
The Board agreed to provide these disclosure exemptions provided it could agree on the first part of issue 1.
Disclosures for all components of an entity that either have been disposed of or are classified as held for sale
Unit of disclosure
The proposed amendments would require providing certain disclosures for all components of an entity that either have been disposed of or are classified as held for sale. The staff noted that these requirements were silent on the issue of aggregation. The Board was asked if it would explicitly require disclosure for every single component meeting the criteria or remain silent on the issue and let entities and their auditors decide on the appropriate level of aggregation. The staff recommended the latter. One Board member noted that it would be a very burdensome requirement for prepares if aggregation would be prohibited and every item would have to be reported on separately.
The Board agreed.
Use of proceeds from disposal activities
The last issue discussed at this session was the question still to require a disclosure related to the intended use for the proceeds from the disposal activities, mainly for reasons of providing forward-looking statements when requiring such a disclosure and that entities often cannot specify the intended use at the reporting date. The staff proposed to delete this specific disclosure requirement.
The Board agreed.
Discussion at the July 2008 IASB Meeting
FASB staff joined the meeting by video link.
The IASB considered issues that needed to be addressed before issuing an Exposure Draft to amend IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The ED's primary purpose is to align IFRS and US GAAP with respect to the definition of discontinued operations and to make other improvements to IFRS 5.
Additional criteria for the definition of a Discontinued Operation
In May 2008, the FASB indicated its preference to amend the previously agreed definition of discontinued operations to include in the definition subsidiaries that meet the criteria to be classified as held for sale on acquisition.
Subsequently, the staff prepared a memorandum for both Boards, which included a recommendation to include in the definition of discontinued operations subsidiaries that meet the criteria to be classified as held for sale on acquisition. In June, the staff was asked to perform additional analysis related to the various alternatives for the definition of discontinued operations discussed by the Boards and to present this analysis at a future meeting. This meeting discussed that analysis.
The Board considered four alternatives for an additional grouping of assets that would meet the definition of discontinued operations, in addition to those components that are operating segments. These were:
- View A: All components of an entity that meet the criteria to be classified as held for sale on acquisition
- View B: All subsidiaries (in their legal form) that meet the criteria to be classified as held for sale on acquisition
- View C: All businesses as that term in defined in IFRS 3 Business Combinations (revised 2008) that meet the criteria to be classified as held for sale on acquisition
- View D: No additional criteria, only an operating segment can meet the definition of a discontinued operation
After a brief discussion, the Board agreed that the proposed definition of discontinued operations be amended to include businesses as defined in IFRS 3 (revised 2008) that meet the criteria to be classified as held for sale on acquisition (View C).
The Board agreed that there should be no additional requirements that would limit the component of an entity, subsidiary, or business that meets the criteria to be classified as held for sale on acquisition to be reported in discontinued operations only when it is required by law or regulation (for example, as a result of a competition review). A Board member noted that classification as held for sale or discontinued would have to wait for the competition review: how could you classify something as held for sale when the entity did not know what it had to divest?
As a result of these decisions, a discontinued operation would be a component of an entity that:
- (a) meets the definition of an operating segment in accordance with IFRS 8 Operating Segments, and either has been disposed of or is classified as held for sale, or
- (b) is a business in accordance with IFRS 3 Business Combinations (revised 2008) that meets the criteria to be classified as held for sale on acquisition.
Disclosure exemptions
The Board agreed to provide certain disclosure exemptions for businesses that meet the criteria to be classified as held for sale on acquisition. These include certain items in IFRS 5.33 and 39; and IFRS 3 (2008).B64.
Financial statement presentation
The Board agreed that entities should provide reconciliations of 'income from discontinued operations' in the statement of comprehensive income and the assets and liabilities of operations held for sale in the statement of financial position. In providing these reconciliations, an entity would be permitted to:
- (a) aggregate the assets and liabilities of businesses that meet the criteria to be classified as held for sale on acquisition into total assets of a business held for sale on acquisition and total liabilities of a business held for sale on acquisition, respectively; and
- (b) aggregate the assets and liabilities classified as held for sale (other than those in (a)) that are not disclosed separately because they were not considered to be major into other assets and other liabilities, respectively.
- (c) aggregate the profit or loss of businesses that meet the criteria to be classified as held for sale on acquisition into profit or loss of a business held for sale on acquisition; and
- (d) aggregate the income and expense items (other than those in (c)) that are not disclosed separately because they were not considered to be major into other income and expenses.
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