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IFRS 5 — Write-down of a disposal group and reversal of a disposal group impairment losses relating to goodwill

Date recorded:

At the July 2012 meeting, Staff provided the Committee with updates on the issues that have been referred to the Board and have not yet been addressed, except for those being addressed through the annual improvements process. The Committee decided to revisit six issues, two of which related to IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, as follows:

  • Issue 1: how to recognise an impairment loss for a disposal group when the difference between its carrying amount and its fair value less costs to sell exceeds the carrying amount of non-current assets in the disposal group; and
  • Issue 2: how to account for the reversal of an impairment loss for a disposal group when the reversal relates to an impairment loss recognised for goodwill.

Staff provided updates to the Committee in two separate papers, details of which are provided below.

Write-down of a disposal group

The issue addressed here was of the recognition of impairment losses (difference between the carrying amount and its fair value less cost to sell) for a disposal group, where the disposal group is within the scope of IFRS 5. There are four views on how to recognise and allocate an impairment loss of a disposal group when the difference between its carrying amount and Fair Value Less Cost to Sell (FVLCTS) exceeds the carrying amount of non-current assets in a disposal group. These views were to limit the impairment loss to:

  1. non-current assets only;
  2. net asset of a disposal group;
  3. total assets of a disposal group; or
  4. non-current assets and recognise a liability for excess to ensure that a disposal group is measured at fair value less costs to sell.

This issue was discussed by the Committee at the July and November 2009 meetings and the Board deliberated on this issue twice in July and December 2009. In the July 2009 meeting the Committee tentatively decided not to add this issue to its agenda and recommended to the Board to amend IFRS 5 as a matter of priority to address this issue. Consequently the Board agreed with the Committee and tentatively considered amending IFRS 5 as a matter of priority and worked with the FASB to ensure IFRS 5 remained aligned with US GAAP. The same remained true for the November and December meetings in 2009 as a result of a comment letter staff received.

In July 2012, the Committee decided to revisit this issue. After analysing the issue Staff noted that view B (i.e. limiting an impairment loss to net assets of a disposal group) and View C (limiting an impairment loss to total assets of a disposal group) would not be appropriate accounting methods when allocating an impairment loss to assets and liabilities in a disposal group that are not within the scope of the measurement requirements of IFRS 5.

Staff believe view D (i.e. limiting an impairment loss to non-current assets in a disposal group and recognise a liability for any remaining impairment loss in excess of the carrying amount of non-current assets in a disposal group) is not an appropriate accounting method either when recognising an additional impairment loss in excess of the carrying amount of the non-current assets in a disposal group.

The other issue highlighted from the submitter was an apparent contradiction between paragraphs 15 and 23 of IFRS 5. Staff believe there is no contradiction on the basis that paragraph 15 of IFRS 5 sets out the principle while paragraph 23 of IFRS 5 sets a limitation to the application of that principle. In other words, paragraph 15 of IFRS 5 requires an entity to measure a disposal group at the lower of its carrying amount and FVLCTS, whereas paragraph 23 of IFRS 5 limits this principle by restricting the recognition of the impairment loss to the non-current assets in the disposal group that are within the measurement scope of IFRS 5. On the basis of Staff’s analysis, they think IFRS 5 allows for a disposal group to be measured at an amount that is neither its carrying amount nor its fair value less cost to sell and consequently they think View A (i.e. limiting an impairment loss to non-current assets in a disposal group) is in line with IFRS 5.

Based on Staff’s analysis and their agenda criteria assessment, Staff recommended that the Committee should not take this issue onto its agenda. In Staff’s view:

  1. an impairment loss in excess of the carrying amount of the non-current assets in a disposal group should not be allocated to other assets and liabilities in a disposal group, in accordance with paragraph 23 of IFRS 5;
  2. an additional liability for an impairment loss in excess of the carrying amount of the non-current assets in a disposal group should be recognised, if and only if that is required by another IFRS, before applying IFRS 5;
  3. paragraphs 15 and 23 of IFRS 5 are not contradicting each other because paragraph 23 of IFRS 5 is a scope limitation on the application of the principle set out in paragraph 15 of IFRS 5; and
  4. consequently, View A is the appropriate accounting method.

Staff set out the proposed wording for the tentative agenda decision in their paper.

A member started the September 2013 meeting by expressing they agree with the staff proposal as they can follow Staff’s reasoning and the outcome staff have come to but were wondering if a tentative agenda decision was appropriate. The member raised a question over the second paragraph of the agenda decision where Staff specified that “an additional liability for an impairment loss in excess of the carrying amount of the non-current assets in a disposal group should be recognised, if and only if that is required by another IFRS, before applying IFRS 5”. Staff confirmed this is in line with IFRS 5 paragraph 19.

Another member broadly agreed with staff’s proposal but disagreed in one matter as they believe there is a contradiction between paragraphs 15 and 23 of IFRS 5. Therefore the member suggested that staff should prepare an annual improvement or an interpretation of the standard rather than an agenda decision.

A member completely disagreed with staff on all matters and specified that paragraph 15 of the standard is clear, and the core principle of the standard is to write down all assets to fair value less cost to sell. The member, in agreement with other members, suggested that annual improvement or interpretation to change paragraph 23 to bring it in line with paragraph 15 would be more beneficial.

Another member agreed that staff should provide clarification of the order of the allocation of the loss by way of an amendment.

A member highlighted again that paragraph 15 was the key principal driver of the standard. In the scenario discussed there is debt and therefore the value of the disposal group could be written down to the value of the debt. If the facts were different and the value of the disposal group was an asset, then the value would not be recognised other than at zero (i.e. negative fair value would not be recognised). Another member agreed with this member and therefore suggested the Committee should take this onto its agenda, which would allow them to examine the facts and circumstances more closely.

There was disagreement between members with regards to the comment above about negative fair value and it was suggested that the focus should be the steps to follow in determining the fair value less cost to sell of a disposal group.

Another member suggested looking at the disposal group as a whole, which is in line with paragraph 4 of IFRS 5. The issue here seems to be a unit of account issue where the two options are to look at the whole disposal group or only the piece of the non-current assets. The member said that paragraph 19 of IFRS 5 deals with the unit of account issue, where on subsequent remeasurement of a disposal group, the carrying amounts of any assets and liabilities that are not within the scope of the measurement requirements of this IFRS, but are included in a disposal group classified as held for sale, shall be remeasured in accordance with applicable IFRSs before the fair value less costs to sell of the disposal group is remeasured. The member went on to explain further that the unit of account has not changed in this instance and in accordance with paragraph 38, it is the unit of presentation that has changed to be a disposal group. Therefore the member would only account for the impairment that deals with the non-current asset. All other assets and liabilities would be recognised and recorded under other standards. The Chairman articulated further by explaining that in following this member’s logic, the non-current assets are not impaired to zero as they have a fair value, in this particular case there is a financial liability and following on from the logic, the asset would be credited for a change in fair value of that liability, and therefore it does become a unit of account issue.

The member explained that the standard attempts to recognise the whole disposal group at fair value rather than individual assets and liabilities.

The Committee concluded with a clear majority of members in agreement that they should not reject the issue. Staff need to address the issue of “unit of account” more closely and revisit the following:

  • the issues the board looked at in June 2011;
  • reach out to those who drafted IFRS 5 and understand their views on effects on IFRS 5 in light of the implementation of IFRS 13;
  • consider other examples where the combination of debt and assets may be different to the one presented above.

Staff are to bring this issue back to the Committee in November 2013, where it will be dealt with more comprehensively.

Reversal of impairment losses relating to goodwill recognised for a disposal group

The issue addressed here looks at the reversal of impairment losses relating to goodwill recognised for a disposal group. There are two views as follows:

  • View 1 — reversal of an impairment loss should not be recognised if it relates to the reversal of previously impaired goodwill of the disposal group classified as held for sale.
  • View 2 — reversal of an impairment loss should be recognised if it relates to the reversal of previously impaired goodwill of the disposal group classified as held for sale. This reversal may include:
    • impairment losses recognised for goodwill during the period in which the disposal group is classified as held for sale; or
    • all impairment losses recognised for goodwill in previous periods, including those that were recognised prior to the disposal group being classified as held for sale.

The Committee discussed this twice in March and May 2010, where they noted the potential conflict between guidance in IFRS 5 in paragraphs 22 and 23 (which relate to the recognition and allocation of the reversal of an impairment loss for a disposal group). At the first meeting, the Committee observed that the issue may not be resolved efficiently within the confines of existing Standards and the Framework and that it is not probable that the Committee will be able to reach a consensus on a timely basis. Also, as the IASB decided not to add this project to their agenda in December 2009, the Committee decided not to add this issue to its agenda and recommended that the IASB should address this issue in a post implementation review of IFRS 5.

Staff performed outreach in August 2012 to understand if there was any diversity in practice in relation to this issue and the prevalent practice. From their outreach Staff concluded this is not a common issue but there is diversity in practice where the issue arises.

In the September 2013 meeting, Staff presented to the Committee the issue of whether IFRS 5 requires an entity to identify a reversal of an impairment loss that relates to the reversal of a previously impaired goodwill in a disposal group. After Staff’s analysis Staff disagreed with both views (View 1 — an impairment loss relating to goodwill should not be

Reversed, View 2 — an impairment loss relating to goodwill should be reversed), as they believe the issue is not relevant in the context of IFRS 5. Staff expressed that neither paragraphs 22 nor 23 of IFRS 5 requires an entity to identify whether a reversal of impairment loss relates to the reversal of previously impaired goodwill in the disposal group, and they gave their reasons.

Staff then presented their analysis on the unit of account issue, which was in line with the previous paper presented to the committee, where they expressed IFRS 5 is based on the concept of ‘one single asset or one single liability’ because it requires a disposal group to be measured at the lower of its carrying amount and FVLCTS. However, in terms of the recognition and the reversal of an impairment loss, IFRS 5 is based on the concept of ‘separate assets and liabilities’. This is because IFRS 5 requires:

  • the impairment loss in a disposal group to be allocated only to the non-current assets in the group that are within the scope of the measurement requirements of IFRS 5 in accordance with paragraph 23 of IFRS 5; and
  • the reversal of an impairment loss to be allocated to non-current assets, except for goodwill, in the disposal group.

Staff concluded as follows:

  • the amount of the reversal of an impairment loss for a disposal group is measured at the lower or its carrying amount and FVLCTS as if the disposal group is a single unit of account.
  • the amount of the reversal of an impairment loss for a disposal group that can be recognised is, however, limited by:
    • the amount already recognised by applying other IFRSs to measure the assets and liabilities that are not within the scope of the measurement requirements of IFRS 5; and
    • the remainder of the reversal is further limited to the cumulative impairment loss previously recognised in respect of the non-current assets within the scope of the measurement requirements of IFRS 5.
  • when recognising the amount of the reversal of an impairment loss identified as the “remainder” above, it is allocated to those non-current assets in the disposal group that are within the scope of the measurement requirements of IFRS 5 pro rata with the carrying amount of those assets, except that no reversal is allocated to goodwill; and
  • the measurement of FVLCTS for a disposal group does include a reversal of a previously impaired goodwill but it will not be recognised until the disposal group is disposed of and derecognised, which is in line with paragraph 24 of IFRS 5.

A member began the discussion by disagreeing with staff as the paper was in contradiction with the agenda paper presented before this paper. In this case the unit of account does not change; it is the unit of measurement that changes. In addition, the member explained that the disposal group should be looked at as a whole initially and then for the purposes of impairment assets can be assessed on an individual basis.

Another member agreed with the views above and expressed that impairment losses on goodwill should never be reversed. In agreement, another member said the standard was difficult to interpret in this respect and therefore this should not be a rejection by the Committee. The member further explained that the issue here was a change in the unit of measurement and presentation rather than account.

The Committee concluded that Staff will bring this issue back to the November 2013 meeting after incorporating all comments made on this agenda paper by members as well as comments made on the previous agenda paper, as they are both interlinked.

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