Amendment to IFRS 5: Discontinued Operations
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.
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.