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

Date recorded:

Background

This issue was part of the same request as the previous IFRS 5 issue.

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 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 Committee whether:

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 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 March 2013, the Staff noted that the submitter asked the question whether:

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 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 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.

After the discussion, the Chairman 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.

May 2013 meeting

Upon further reflection, the Staff came up with the proposal to amend IFRS 5 within the Annual Improvements cycle for 2012-2014 as follows:

  1. an asset (or disposal group) is reclassified from being classified as held for sale (on the basis of the criteria in paragraphs 7-9) to being classified as held for distribution (on the basis of the criteria in paragraph 12A) shall continue to apply the requirements in IFRS 5 applicable to non-current assets (or disposal groups) classified as held for sale (in accordance with paragraph 5A) and not follow the accounting requirements in paragraphs 26-29 of IFRS 5; and
  2. from being classified as held for distribution to being classified as held for sale is not considered a change to a plan of sale and shall continue to apply the requirements of IFRS 5 applicable to non-current assets (or disposal groups) classified as held for sale and not follow the accounting requirements in paragraphs 26-29 of IFRS 5.

The Staff also recommended the inclusion of additional guidance in IFRS 5 to state that in circumstances in which an entity has classified an asset (or disposal group) as held for distribution, but the criteria in paragraph 12A are no longer met, the entity shall cease to classify the asset (or disposal group) as held for distribution and apply the guidance in paragraphs 27-29.

The Committee approved both the decision to amend IFRS 5 and the proposed amendments (as modified by drafting comments).

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