Non-current Assets Held for Sale and Discontinued Operations

Chronology

Timetable

Project Summary

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:

  1. 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.
  2. 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.
  3. 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.

September 2008: IASB Exposure Draft proposes revised definition of discontinued operations

On 25 September 2008, the IASB issued an exposure draft of proposed amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The proposals are to revise the definition of discontinued operations and require additional disclosure about components of an entity that have been disposed of or are classified as held for sale. The proposals are the result of a joint project by the IASB and the US Financial Accounting Standards Board to develop a common definition of discontinued operations and require common disclosures about them. The FASB is publishing parallel proposals to amend its standards.

Click for Press Release (PDF 35k). The deadline for public comment is 23 January 2009. The ED may be downloaded without charge from IASB's Website.

Discussion at the April 2009 IASB Meeting

The Board discussed how to proceed with the comments received on the exposure draft Discontinued Operations: Proposed Amendments to IFRS 5.

The Board discussed a staff recommendation that because the disposal of or classification to held for sale of an operating segment may or may not represent a strategic shift in the entity's operations, the Board should adopt a principles-based approach and define a discontinued operation as a component of an entity whose disposal of or classification to held for sale represents a strategic shift in the entity's operations.

Many Board members were unhappy about the proposal, not least because the staff were not proposing to define or elaborate significantly on what a 'significant shift' represented. To these Board members, this was an open invitation to 'do what you want' reporting. Others preferred to see the effects of discontinued (and discontinuing) operations reported in the segment disclosure note. However, other Board members had a problem with that approach, primarily because the segment disclosure may be based on non-IFRS measures and lacks discipline.

Ultimately, the Board referred itself to a possible approach being developed by the FASB. This approach was described as:

  • (a) Eliminate the requirement to present discontinued operations (except for businesses that meet the criteria to be classified as held for sale on acquisition) on the face of the statement of comprehensive income. The effects of businesses that meet the criteria to be classified as held for sale on acquisition would continue be presented separately from continuing operations (but possibly with a label that better describes these items).
  • (b) Disclosures would be required for all components of an entity that have been disposed of or classified as held for sale, for the items proposed in the exposure draft, for all periods presented.

The Board agreed that they owed it to their constituents and to the FASB to explore this possible approach. They undertook to contact their users' forum, the Corporate Reporting Users Forum, as well as representatives in industries for which the issue is significant, such as REITS and retail groups. Board members noted that the FASB approach might not change or conform the definition of discontinued operations, but enhancing the disclosure in a useful way in this area would be a significant improvement. It is likely that, if the FASB approach is developed, it would trigger re-exposure.

The Board agreed that the staff should coordinate their constituent outreach activities with those of the FASB staff.

Discussion at the July 2009 IASB Meeting

Definition of discontinued operations

The Board discussed the definition of discontinued operations and the need for the presentation of discontinued operations on the face of the statement of comprehensive income following comments received on the exposure draft published in 2008.

Some Board members did not feel that discontinued operations shall be presented on the face of the statement of comprehensive income; they would have preferred alternative disclosure in the notes. One Board member suggested that the most suitable place for such disclosures and accompanying reasons for classification is the management commentary. Nonetheless, most of the Board members defended the current requirements as they did not feel that notes are the right place for such important information (as net income from continuing operations represents input to basic performance metrics). Moreover, some members of the Board were concerned that requiring only disclosure in the notes could open further structuring opportunities. After a prolonged discussion the Board approved (by 10 votes to 5) retaining the requirement for presentation of discontinuing operations on the face of the statement of comprehensive income.

Most of the following discussion focused on the appropriate definition of a discontinued operation. The staff presented three alternatives of a definition (component representing strategic shift in operations, operating segment representing strategic shift in operations and significant operating segment). The Board discussed this issue in great detail, with many Board members uneasy about a definition based on operating segment as that definition would on one hand increase the structuring opportunities and on the other hand excessively increase the number of reported discontinued operations. Many Board members were also uneasy about including 'significant' operating segment in the definition, as significant is not defined. After a significant discussion the Board agreed that a definition shall be based on the reportable segments (segment already reported) in order not to have a large number of different operating segments to be reported as discontinuing operation. By aligning the definition in IFRS 5 and IFRS 8 the Board tried to improve consistency between those standards.

On disclosures, the Board discussed the proposed enhancement of required disclosures. Many members of the Board felt that the proposal brought by the staff requiring additional separate disclosures on components and rules on their aggregation would place excessive requirements on the preparers without enhancing the quality of the financial statements. Many Board members also raised the issue that these requirements seem to be more prescriptive and detailed that those currently in US GAAP due to difference in requirements for operating segments (difference in definition, required disclosures). As a consequence, the staff was directed to re-visit the US requirements and propose disclosure that would fully converge with US GAAP.

OCI items within discontinued operations

The staff presented the Board with a potential annual improvement item regarding presentation of OCI items related to discontinued operations in the statement of comprehensive income. In discussion some of the Board members proposed combining presentation of discontinued operations into one line of statement of comprehensive income (income statement and OCI items together), some proposed similar changes for the statement of financial position within equity. Several Board members felt that the disclosure in the statement of financial position would be more informative. Other members believed that the need for separate presentation would create more work for the preparers without any additional benefit to the users. Finally, the Board decided to limit the amendment for statement of comprehensive income and include it in annual improvement process.

Discussion at the October 2009 Joint IASB-FASB Meeting

What Constitutes a Discontinued Operation

The FASB and IASB resumed their discussions around what constitutes a discontinued operation. The staff presented a paper discussing a proposed definition for a discontinued operation, considering:

  1. what the appropriate starting point would be for a definition,
  2. whether it should include a significance criterion, and
  3. whether a definition should include a continuing involvement criterion.

Several members of both Boards questioned whether discontinued operations should continue to be presented on the face of the financial statements or whether footnote disclosures alone were more appropriate. FASB staff said that users overwhelmingly support showing discontinued operations on the face of the financial statements. Ultimately, both Boards voted to continue to require the presentation of discontinued operations on the face of the financial statements.

A few Board members questioned whether the proposed definition of discontinued operations was too arbitrary and would allow different users to reach different conclusions on what meets the definition. This could present opportunities for earnings management.

Some members of the IASB questioned whether the current definition under IFRS 5 was more appropriate and suggested amendments were not needed to IFRS 5. The FASB staff noted the proposed definition was similar to IFRS 5 except the staff tried to add some principles where it made sense from an analysis point of view. The IASB indicated that they would like to retain the current definition under IFRS 5.

Next Steps in the Project

The FASB staff outlined the next steps for this project. The FASB staff will consider differences between their proposed definition and the IFRS 5 definition and determine whether they believe that changing the current definition to the IFRS 5 definition will be an improvement to financial reporting. Further, the FASB staff will perform an analysis of the disclosure requirements under IFRS 5 and determine whether they believe those disclosures are adequate or if additional disclosures may be needed. The FASB indicated that they would like to discuss the staff's findings and considerations during November.

Discussion at the December 2009 IASB Meeting

Write-down of a disposal group and discontinued operations OCI items

In response to a request made by the Board at its July 2009 meeting to work with the FASB to ensure the IFRS 5 remained consistent with US GAAP, the staff presented the outcome of the work performed on the following matters:

  • a. tentative decision to clarify how an impairment loss should be recognised when the impairment is greater than the carrying amount of the non-current assets in the disposal group;

  • b. tentative decision to remove inconsistencies in disclosure requirements of OCI items relating to discontinued operations; and

  • c. determining whether improvement of disclosures of accumulated OCI is required.

One Board member questioned whether there would be any items left to be addressed if these three matters were resolved. The staff responded that the matter relating to the definition of discontinued operations still needs to be resolved.

Without much deliberation, the Board unanimously agreed with the proposals in the following way:

  • a. The matter dealing with the impairment of a disposal group is significant enough to warrant a separate project, but IFRS 5 is not the right project for it. The Board recommended that the issue should be added to the IAS 36 amendments agenda.

  • b. An amendment to IFRS 5 is no longer appropriate as the matter will be resolved in the project on Financial Statement Presentation.

  • c. The current disclosure requirements of IFRS 5 are sufficient. An amendment to IFRS 5 is not required.

Definition of discontinued operation

The Boards re-deliberated the proposed amendments to discontinued operations guidance. Without much discussions the Boards agreed the (slightly modified) IASB definition of a discontinued operation:

A discontinued operation is 'a component that either has been disposed, or is classified as held for sale, and
  • (a) represents a separate major line of business or geographical area of operations,
  • (b) is part of a single co-ordinated plan to disposed of a separate major line of business or geographical area of operations, or
  • (c) is a business that meets the criteria to be classified as held for sale on acquisition'.

Disclosures

The Boards also agreed that following disclosures should be included for current and prior periods presented in the financial statements:

  • a. The profit or loss, together with major income and expense items constituting that profit or loss, including impairments, interest, depreciation, and amortisation;
  • b. The major classes of cash flows (operating, investing, and financing);
  • c. A reconciliation of the major classes of assets and liabilities classified as held for sale in the notes to the financial statements to total assets and total liabilities classified as held for sale that are presented separately on the face of the statement of financial position income;
  • d. A reconciliation of the profit or loss for disposals presented in the notes to the financial statements to the after-tax profit or loss from discontinued operations presented on the face of the statement of comprehensive income;
  • e. If the component includes a non-controlling interest, the profit or loss attributable to the parent.

In addition, both Boards agreed to require disclosures about disposals of long-lived assets and disclosures about significant components of an entity that did not qualify as discontinued operations but without providing details of the related cash flows.

The Boards continued with a lively discussion of additional disclosures regarding the entity's continuing involvement with the disposed component and the continuing cash flows between the ongoing entity and the disposed component. Most Board members were concerned that the proposed disclosures regarding continuing cash flows were excessive and not operational. The Boards clarified that only the disclosures regarding continuing involvement should be provided. Moreover, the Boards agreed that those disclosures should be provided only for the discontinued operations presented in the current financial statements to achieve comparability and avoid 'creating' artificial growth in earnings through classifying operations as discontinued.

The Boards agreed to propose a prospective application of the Standard with the effective date of 1 January 2011 (15 December 2010 for the U.S. GAAP).

On the need for re-exposure, both Boards tentatively agreed that re-exposure was warranted and agreed to align publication dates and comment periods. Both Boards will revisit that decision in January with a formal staff paper.

Discussion at the January 2010 IASB Meeting

The Board agreed to re-expose the proposals regarding the definition of discontinued operations and related disclosures for a period of 60 days.


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