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IFRS 5 — Non-current assets held for sale and discontinued operations

Date recorded:

Agenda Paper 3: Cover paper

The Visiting Fellow introduced the series of agenda papers and said that the cover paper gave an overview of the issues that would be discussed in the meeting as well as issues that had been discussed previously by the Committee.

The Chairman noted that in the previous meetings the Committee had performed something similar to a post issuance review which had not been officially performed for IFRS 5.

Agenda Paper 3A: Issue 1: Scope of classification as held for sale

The Visiting Fellow said that in the previous meeting the Committee had noted that it would be important to better understand the scope of IFRS 5. He said that the scope had changed over the past years as several amendments had been made to IFRS 5. Also, the focus on the method of recovery of the carrying amount of non-current assets or disposal groups had shifted from a sale transaction to any methods, other than continuing use. The staff believed that the objective for the scope of the held for sale classification under IFRS 5 was to capture a non-current asset or a disposal group over which an entity was committed to lose control, irrespective of the form of the transaction, and where there would still be a carrying amount of the asset or disposal group to be disposed of at the time of disposal. The fact that the Committee had discussed this topic over the previous meetings without a consensus had revealed that the Standard would benefit from a clarification. The staff therefore recommended bringing the issue to the attention of the IASB.

One Committee member said that he agreed that the scope was unclear as regards the loss of control. He said that it was possible that the scope was broadened with intent and not stealthily. He would have liked to see a discussion about the usefulness of applying IFRS 5 to loss of control situations. He said that call options should also be considered in this discussion.

Another Committee member supported the broadening of the scope and said that the kind of transaction that leads to disposal was irrelevant. The focus should be on the economics of the transaction.

One Committee member said that the commitment to lose control should be reconciled with cases where change of control occurred through a change in agreement or where the original agreement included clauses that would lead to a change of control eventually.

A fellow Committee member said that the issue could be interpreted by the Committee unless the Committee decided there was a broader issue with the Standard.

Some Committee members wondered what would happen after control was lost if a non-controlling interest were to be retained. An observing IASB member added that the accounting mechanics were unclear, for example, in that case how much of the share would be remeasured at the instant it qualified as held for sale.

A Committee member expressed concerns about applying the criteria in IFRS 5 to call options as those options were not in control of management. A fellow Committee member suggested to scope those out but conceded that this would have to be done by the IASB. An observing IASB member replied that one view could be that writing the option was enough for a held for sale classification and the other view could be that the classification depended on the probability that the option was exercised. She reminded the Committee that this year would see an agenda consultation where it might be worth flagging the issue.

The Chairman asked whether ‘loss of control’ would work as well as ‘sale’ with the criteria in IFRS 5. The Visiting Fellow confirmed that. One Committee member said that he did not understand how IFRS 5 could apply to sales and distributions but not to dilutions.

The Chairman suggested discussing the rest of the agenda papers first before deciding to forward the issue to the IASB.

Agenda Paper 3B: Presentation of intragroup transactions between continuing and discontinued operations

The Visiting Fellow said that IFRS 5 required information to enable users to understand the effect of discontinued operations. However, neither IFRS 5 nor IFRS 10 provided guidance on how to present intergroup transactions between continued and discontinued operations. The paper gave three views on the topic. View 1 suggested eliminating the transactions in full without any adjustments. View 2 suggested eliminating with adjustments that showed how those transactions would be reflected in continuing operations going forward. View 3 suggested not eliminating those transactions.

Staff had analysed that there was no guidance in IFRS 5 or IAS 1 that overrode IFRS 10 which required eliminating intragroup transactions. Therefore, the staff were in View 1. Adjustments that were in line with View 2 would be permitted to be disclosed in the notes. However, the staff felt it would be an improvement if the Standard was amended to permit presentation of those adjustments on the face of the income statement.

A Committee member said that he would agree from an analyst perspective. He also agreed that information was more relevant but he was uncertain about it being more comparable (as stated in the agenda paper). The Visiting Fellow said that it would be more comparable across reporting periods.

Another Committee member disagreed with View 1. He expressed a preference for View 3 as this would be in line with IFRS 8 presentation of intersegment transactions. Several Committee member disagreed with that and expressed a preference for View 1. One Committee member said that he saw the need for disclosures.

An observing IASB member said that she leaned towards View 2 but she was concerned about requiring “as if” disclosures. Her concern was about situations where it was not yet decided whether the entity would purchase output from its former operation or from an external party. She said it would be interesting to see what happened if the entity changed to purchasing from an external party. One committee member said that this would be difficult as financial statements should reflect what had actually occurred.

The Chairman concluded that there was an agreement amongst Committee members that IFRS 5 did not have any guidance that overruled IFRS 10. Also, none of the Committee members supported View 2. He asked the Committee if, in that case, they would still like to forward the issue to the Board since View 2 was the only view that would require an amendment of IFRS 5. The Visiting Fellow said that the IASB could still require disclosures in line with View 2. The Chairman replied that this would be a pro-forma disclosure. The discussion however had revealed that the Committee did not want a pro-forma disclosure. One Committee member said he saw it rather as continuing involvement than pro-forma.

One Committee member suggested issuing an agenda decision pointing out that IFRS 10 required elimination of intragroup transactions and IFRS 5 required disclosures that enabled users of financial statements to evaluate the financial effects of discontinued operations.

No decision was taken.

Agenda Paper 3C: Disclosure relating to non-current assets (or disposal group) within the scope of IFRS 5

The Visiting Fellow noted that IFRS 5 stated that disclosures in other IFRSs did not apply to assets held for sale or disposal groups unless they were explicitly required by those Standards. IFRS 12 clarified that the summarised financial information for subsidiaries, joint ventures and associates was not required for assets held for sale. The submitter had asked whether the exemption would apply to this section of IFRS 12 only or whether it would apply to all of IFRS 12. The staff concluded that all of IFRS 12 would not apply to IFRS 5 assets as there were no specific requirements for IFRS 5 assets in IFRS 12. Therefore, the staff recommended that the issue was not taken onto the Committee’s agenda.

One Committee member disagreed with the staff analysis. He said that many of the disclosures in IFRS 12 pertained to the investor/investee relationship. Therefore, those requirements applied, except the ones that were explicitly scoped out. Other Committee members agreed with the submitter that the explicit exemption in IFRS 12 was ambiguous. An observing IASB member believed that the Board had intended to apply IFRS 12 to all IFRS 5 assets except the paragraphs that were explicitly scoped out.

When called to vote, nine of the fourteen Committee members supported the staff’s recommendation. One observing IASB member suggested flagging this decision to the IASB.

Agenda Paper 3D: The extent of impairment loss for a disposal group that can be allocated to non-current assets in the disposal group

The Visiting Fellow informed the Board that the agenda paper addressed the issue of allocating impairment losses to non-current assets within a disposal group so that their carrying amounts were reduced below their fair values. IFRS 5 referred to IAS 36 for the order of allocation but not for the extent of an impairment loss that an entity could allocate to the asset. The staff had analysed that the measurement should focus on the disposal group in its entirety and not on individual assets and liabilities included in the disposal group. Therefore, the loss allocated to individual assets and liabilities should not be restricted by their fair value less cost to sell. Staff recommended considering this issue together with other measurement issues identified in previous meetings.

One Committee member agreed with the staff’s analysis that the unit of account was the disposal group. However, he asked what would happen if the carrying value would become negative by allocating the impairment loss.

Another Committee member agreed with the staff’s analysis but expressed concern about considering the issue together with other issues as this could be easily addressed by way of an agenda decision. The other issues were different as they concerned allocation of impairment losses to assets that were outside of the scope of IFRS 5.

The Chairman suggested holding off on the issue.

Agenda Paper 3E: Presentation relating to a disposal group when there has been a change to a sale plan

The Visiting Fellow said that the agenda paper examined the situation where a plan to sell a disposal group including a subsidiary and other non-current assets changed. The paper also addressed the question whether retrospective amendment only applied to measurement or also to presentation.

The submitter believed that if reading IFRS 5 literally, the measurement for the subsidiary should be restated also for comparative periods whilst the measurement for other non-current assets should only be amended in the current period. The staff agreed with that, although the requirements were inconsistent with each other in the staff’s view. They also concluded that the term ‘retrospective amendment’ included measurement and presentation but conceded that the Standard was unclear in this respect.

One Committee member agreed with the staff’s conclusion on both issues. He suggested considering the issues further instead of issuing an agenda decision. Several Committee members agreed with the suggestion.

One Committee member agreed with the inconsistency. He said that asset deals and share deals would be treated differently under the current wording of IFRS 5.

The Chairman concluded that on several of the issues that had been discussed in this session, the Committee proposed to forward the issue to the IASB. Hence, he proposed to forward them as a group for inclusion in the agenda consultation and suggested not issuing any agenda decisions. One Committee member said that he agreed under the condition that if the Board decided to make this a long-term project, the Committee would address the issues that could be resolved quickly. This approach was supported by several Committee members. An observing Board member suggested considering a two-part approach, i.e. short-term amendments and long-term amendments. The Chairman agreed and concluded that this was a good way of taking it forward.

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