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IFRS 5 — Classification in conjunction with a planned IPO, but where the prospectus has not been approved by securities regulator

Date recorded:

In February 2013, the Committee received a request from the European Securities and Markets Authority (ESMA) to clarify the application of the guidance in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, regarding the classification of a non-current asset (or disposal group) as held for sale, in the case of a disposal plan that is intended to be achieved by means of an initial public offering (IPO) but where the prospectus has not been approved by the securities regulator.

The Chairman noted that in the March 2013 Committee meeting, no vote was held as to the concerns raised by the submitter as it was considered that based solely upon the submission the Committee might not have adequate information upon which to form a conclusion.

In relation to the specific fact pattern, the submitter asked the Committee whether a division (i.e. division B) would qualify as ‘held for sale’ when there was a disposal plan that was intended to be achieved by means of an initial public offering, but where the prospectus had not been approved by the securities regulator, assuming all the other criteria in IFRS 5 have been fulfilled?

The Staff noted that the answer was one of two – either the approval of a prospectus by a competent securities regulator was a condition required for the disposal plan to qualify as held for sale under the requirements of IFRS 5 or it was not.

Staff noted that some respondents to the tentative agenda decision believe the approval of the prospectus by a competent securities regulator is a condition that is required to meet the criteria in paragraph 8 of IFRS 5 so that the sale of the disposal group can be considered highly probable.

Staff also noted that others have a different view and think that the approval of a prospectus by the securities regulator is not needed to classify the disposal group as held for sale. Staff noted that these individuals see that entity A (in the fact pattern discussed in the Staff paper) had been actively involved in the preparation of the prospectus and in ensuring that the prospectus’ approval by the securities regulator would be highly probable.

Staff noted that paragraph 7 of IFRS 5 sets out two requirements for the classification of a non-current asset or disposal group to be classified as held for sale:

  1. the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups); and
  2. its sale must be highly probable.

Staff then considered the criteria in paragraph 8 of IFRS 5 for the sale to be considered as highly probable, which is as follows:

  • the appropriate level of management must be committed to a plan to sell the asset (or disposal group;
  • an active programme to locate a buyer and complete the plan must have been initiated;
  • the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value;
  • the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, except as permitted by paragraph 9;
  • actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn; and
  • the probability of shareholders’ approval (if required in the jurisdiction) should be considered as part of the assessment of whether the sale is highly probable.

In relation to the fact pattern submitted and by applying the criteria in paragraph 8 of IFRS 5, Staff agreed that the sale of division B by means of an IPO could not be considered highly probable.

Staff also noted that they considered the guidance in IFRS 5 for the classification of an asset (or disposal group) were clear and no further guidance in IFRS 5 was required.

Some Committee members disagreed with the Staff view.

A number of Committee members emphasised that the conclusion that would be reached would be heavily reliant upon the facts and circumstances.

In the May 2013 meeting Staff recommended not to add this issue onto to the agenda and provided wording for the tentative agenda decision. The reasoning in the agenda decision had changed since the Committee’s meeting in March 2013 based on the Committee’s discussion during the meeting:

  • ‘an entity should apply the guidance in paragraphs 6-9 to determine whether a non-current asset (or a disposal group) is available for immediate sale and to determine whether the sale is highly probable’ and
  • ‘an entity should make an assessment of whether a non-current asset or a disposal group by means of an IPO meets criteria (a) to (c) of [paragraph 8 of IFRS 5] above, and that a probability assessment must be made for criteria (d) to (f) in order to conclude overall whether the disposal is highly probable’.

In other words, the assessment of some of the IFRS 5 criteria is event-driven (‘must be met’) and the assessment of other criteria is probability-driven (‘should be met’).

One Committee member was unsure about the splitting of the criteria into two groups.

Other Committee members were unsure about the probability assessment of the various criteria, i.e. it was the opposite way around – the criteria was assessed in order to come to the conclusion about the probability of a sale.

Several Committee members noted that the wording of the agenda decision sounded more like an interpretation.

The Committee decided the issue could be resolved efficiently within the confines of the existing IFRSs and concluded that neither an interpretation nor an amendment to IFRSs was necessary and decided to issue a tentative agenda decision. The Committee approved the tentative agenda decision that staff presented (as modified by drafting comments provided off-line).

In the September 2013 meeting, staff discussed comments they received and redrafted the tentative agenda decision. The changes were related to paragraphs 6 and 7 of IFRS 5, where staff wanted paragraph 7 to emphasise that the asset (or disposal group) must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets (or disposal groups). Staff agreed with this suggestion and therefore included this reference in the final wording of the agenda decision.

The Committee agreed with the majority of wording for the final agenda decision as presented in the staff paper but recommended some edits. A member said it is unusual to refer to the same paragraph twice within an agenda decision in the manner it was in this agenda decision. Another member mentioned that paragraph 6 of IFRS 5 does not deal with “highly probable” criteria and paragraph 7 of IFRS 5 does not flow with the discussion in the agenda decision either. The Committee agreed to shuffle the paragraphs in line with suggestions from members.

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