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IFRS 5 — Classification in conjunction with a planned IPO and change of disposal method

Date recorded:

In February 2013, the IFRS Interpretations Committee (‘the Interpretations 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:

  1. 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; and
  2. a change in a disposal plan from a plan that previously qualified as held for sale into a plan to spin off the disposal group and distribute a dividend in kind to its shareholders.

In relation to their specific fact pattern (where an entity, A was planning to dispose of a profitable operation, B by way of an IPO), the submitter asked the Interpretation Committee whether:

  1. 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?
  2. a change in a disposal method from a plan that previously qualified as held for sale to a plan to spin off a division, and issue a dividend in kind to the shareholders, would qualify as a change to a plan of sale?

The Chair noted that in the March 2013 Interpretations Committee meeting no vote would be 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.  The Chair noted that in the next Interpretations Committee meeting more information would be submitted to the Committee that would enable them to form a conclusion as to the questions asked.  The Chair noted that the objective of the March 2013 Interpretations Committee meeting was to begin discussions on the questions raised solely based upon the fact pattern/information in the submission but that no vote/conclusion would be reached.

Is an approved prospectus needed to qualify as held for sale?

The Staff noted that the submitter asked the question:

  • Would a division (B) 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 a condition required.

The Staff noted that some 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.  The Staff noted that these individuals feel that without an approved prospectus from the securities regulator the sale cannot be considered highly probable because:

  1. the disposal group cannot be actively marketed for sale at a price that is reasonable in relation to its current fair value; and
  2. Entity A cannot initiate an active programme to locate a buyer.

The Staff noted that as some of the criteria in paragraph 8 of IFRS 5 for the classification of a disposal group as held for sale are not met then the division would not qualify as held for sale.

The 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.  The 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.  The Staff noted that specific facts that these individuals pointed to where that entity A had invested significant time and resources in the preparation of regulatory and sales documents for the securities regulators (i.e. meeting weekly with its outside advisors, and monitoring market conditions) and had contacted prospective institutional buyers before it received regulatory approval. These individuals also highlighted that in the fact pattern, entity A had also regularly communicated its plans to the public and was keeping its plans updated.

The Staff noted that paragraph 7 of IFRS 5 set 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.

The Staff then considered the criteria in paragraph 8 of IFRS 5 for the sale to be considered as highly probable:

  • 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.

The Staff, in relation to the fact pattern submitted, and applying the criteria in paragraph 8 of IFRS 5, agreed that the sale of division B by means of an IPO could not be considered highly probable.  They noted that a relevant action required to consider the disposal plan as highly probable was to locate a buyer for the disposal group after marketing the disposal group actively at a sale price that is reasonable.  The Staff were of the view that entity A had not been able to perform these actions because it had not obtained approval of the prospectus from the securities regulator.  The Staff were clear to point out that their conclusion was formed based upon the specific fact pattern of the submitter – in this case they did not think that all of the criteria in paragraph 8 of IFRS 5 had been met.

The 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.

One Committee member disagreed with the Staff view.  He did not think that it was necessary to issue a prospectus because he considered that the prospectus was the last step in a number of steps that an entity would need to undertake in order to have an IPO. He considered that all of the steps before the approval of the prospectus will indicate that the sale was highly probable and the issuing of the prospectus was just the final stage.  This Committee member also considered that the facts and circumstances of a specific case would need to be considered in determining whether the criteria in paragraph 7 of IFRS 5 had been met.  The Chair provided a view that the criteria in paragraph 7 of IFRS 5 noted that to be classified as held for sale under IFRS 5, one of the criteria was that the non-current asset (or disposal group) must be available for immediate sale.  He questioned how this could be the case when the sales document (i.e. the prospectus) had not been approved by the securities regulator.  One Committee member agreed with this view and that a prospectus was required to get regulatory approval before the non-current asset (or disposal group) could be considered available for immediate sale.

Another Committee member noted that she thought that it is the steps that would have been performed before regulatory approval was received for the prospectus, rather than the regulatory approval for the prospectus that should be assessed to determine whether the sale was highly probable – i.e. regulatory approval was not a condition for the sale to meet the highly probable criteria in paragraph 8.  She also commented that the entity, although not having received regulatory approval for the prospectus, would be prepared for immediate sale (through the previous steps performed) and the receipt of regulatory approval was just administrative.

Another Committee member discussed the Staff conclusions reached in paragraph 30 of their paper.  He did not agree that based upon the fact pattern of the submitter, there was no initiation of an active programme to locate a buyer and complete the plan.  This Committee member noted that the company had publicly announced that they are going to carry out an IPO and had contacted institutional buyers.  He hence thought that based upon the fact pattern, this criteria had been met (which the Staff paper said had not been met).  This member also commented that he disagreed that in the fact pattern, the asset had not been actively marketed for sale at a price that is reasonable in relation to the current fair value.  This Committee member expressed the view that IFRS 5 does not state that the entity needs to publicly publicise the price – the Staff paper assumed that this was a requirement of IFRS 5.

A number of Committee member emphasised that the conclusion that would be reached would be heavily reliant upon the facts and circumstances.  One Committee member did not feel that the Staff comments in the paper were reflective of the submission.  She noted that the submission said that the company believed that the approval of the prospectus was highly probable and if this is the case then she felt that the IFRS 5 criteria for held for sale were met.  She noted that having a condition that you have to get regulatory approval for the prospectus before being able to account for the non-current asset as held for sale is irrelevant if it is highly probable that the entity will receive this.

Another Committee member agreed that approval of the prospectus would not be determinative as to whether the sale of the asset was highly probable.  She noted that in certain situations this may be considered a hurdle to an IPO and hence then one would have to consider the IFRS 5 criteria but based upon the fact pattern submitted this did not seem the case.  She, like other Committee members felt that the approval was just an administrative task.

Does a change in a disposal method qualify as a change to a plan of sale?

The Staff noted that the submitter asked the question whether:

  1. a change in a disposal method from a plan that previously qualified as held for sale to a plan to spin off Division B and issue a dividend in kind to the shareholders would qualify as a change to a plan of sale?

The Staff noted that in accordance with paragraph 26 of IFRS 5, a change of plan or sale occurred when the criteria in paragraphs 7-9 of IFRS 5 were no longer met and the entity, consequently, would cease to classify the asset (or disposal group) as held for sale.

The Staff noted that the answer was one of two – either the change in the disposal method did qualify as a change to a plan of sale because a disposal and a distribution are different transactions and have different classification requirements or the change in the disposal method did not qualify as a change to a plan of sale because the disposal and a distribution are both means to achieve the intended disposal.

The Staff noted that some individuals view that the requirements to classify a disposal group as held for sale (in accordance with paragraphs 7–9 of IFRS 5) are different from the requirements to classify a disposal group classified as held for distribution in accordance with paragraph 12A of IFRS 5. The Staff noted that supporters of this view think that these transactions are different in the following aspects:

  1. a dividend-in-kind does not generate a cash flow for Entity A whereas an IPO does; and
  2. management can approve an IPO whereas a spin-off must be approved by the shareholders.

The Staff noted that these individuals were of the view that changing the disposal plan constituted a significant change in plan and the guidance in paragraph 26-29 of IFRS 5 should be followed.

The Staff were of the view that the focus should be on whether the held for sale criteria in paragraph 8 of IFRS 5 is still met regardless of the method of disposal.  The Staff noted that a disposal group will continue to be classified as held for sale as long as the criteria in paragraphs 7-9 of IFRS 5 continue to be met.  The Staff were of the view that a change in the disposal method from an IPO to a dividend in kind would not automatically cause an entity to fail to meet the criteria in paragraphs 7-9 of IFRS 5.  As long as this criteria continue to be met the asset (or disposal group) can continue to be classified as held for sale.  The Staff view was that there should be continuous assessment of this criteria.

The Staff also noted that they considered the guidance in IFRS 5 for the circumstances where an entity should cease to classify an asset (or disposal group) as held for sale are clear and sufficient.  The Staff noted that they did not think that further guidance was required in IFRS 5.

The Staff recommended that the Interpretations Committee should not take these issues onto its agenda.  The Staff proposed issuing two tentative agenda decisions for the two issues.

The Staff asked the Interpretations Committee whether they agreed with the wording of the tentative agenda decisions.

Some Committee members expressed broad tentative support for the Staff proposals.  No significant Committee comments were received in relation to the second question in the Staff paper.

The Chair noted that the majority of the Committee members were sharing the same view and were not in agreement with the Staff paper.  He noted however, that even though initial views were starting to be formed, he would like to continue the discussion in light of the follow up submission that would be received.  There were no objections to this proposal by the Chair.

No vote was held in the meeting.

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