Non-current Assets Held for Sale, Discontinued Operations (PFRS 5), and Borrowing Costs (PAS 23)

Two standards that share a habit: both change the measurement basis of an asset once a trigger is met. PFRS 5 stops the clock on depreciation and reprices the asset for sale. PAS 23 turns an ordinary expense into part of an asset's cost while the asset is being built.

Core concept

PFRS 5: when is an asset held for sale?

A non-current asset, or a disposal group, is classified as held for sale when its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Two conditions must both hold:

1. The asset is available for immediate sale in its present condition, subject only to terms usual and customary for such sales; and
2. the sale is highly probable.

Highly probable is defined, not left to judgement. Management at the appropriate level must be committed to a plan to sell, an active programme to locate a buyer must have been initiated, the asset must be actively marketed at a price reasonable in relation to its current fair value, the sale should be expected to qualify as a completed sale within one year of classification, and actions required to complete the plan should indicate that significant changes to it are unlikely.

An asset to be abandoned is not classified as held for sale, because its carrying amount will be recovered principally through continuing use. It is not depreciated only if it is fully depreciated; abandonment alone does not stop depreciation.

PFRS 5: measurement and presentation

Measure at the lower of carrying amount and fair value less costs to sell.

Immediately before classification, the asset is first measured under the standard that previously applied, for instance PAS 16 or PAS 36. Only then is the held-for-sale test applied to that fresh carrying amount.

Three consequences:

• A write-down to fair value less costs to sell is an impairment loss in profit or loss.
• A subsequent increase in fair value less costs to sell is recognised as a gain, but only to the extent of the cumulative impairment loss previously recognised, whether under PFRS 5 or earlier under PAS 36. Never above the original carrying amount.
• Depreciation and amortisation cease while the asset is classified as held for sale. This holds even if the sale takes longer than expected.

A non-current asset classified as held for sale is presented separately in the statement of financial position, ordinarily among current assets, and it is not offset against the liabilities of a disposal group.

If the criteria cease to be met, the asset is reclassified out and measured at the lower of its carrying amount before classification, adjusted for any depreciation that would have been recognised had it never been classified, and its recoverable amount at the date of the decision not to sell.

PFRS 5: discontinued operations

A discontinued operation is a component of an entity that has either been disposed of or is classified as held for sale, and that:

• represents a separate major line of business or geographical area of operations; or
• is part of a single coordinated plan to dispose of such a line or area; or
• is a subsidiary acquired exclusively with a view to resale.

In the statement of profit or loss, a discontinued operation is presented as a single amount, comprising the post-tax profit or loss of the operation and the post-tax gain or loss on the measurement to fair value less costs to sell or on the disposal itself. The analysis of that single amount is disclosed, and comparative figures are re-presented on the same basis.

PAS 23: borrowing costs

Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset are capitalised as part of the cost of that asset. All other borrowing costs are expensed.

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Inventories routinely manufactured in large quantities on a repetitive basis, and assets ready for their intended use when acquired, are not qualifying assets.

Capitalisation begins when the entity incurs expenditures for the asset, incurs borrowing costs, and undertakes activities necessary to prepare the asset for its intended use or sale. All three must be present.

Capitalisation is suspended during extended periods in which active development is interrupted. It is not suspended during a period when substantial technical or administrative work is being carried on, nor for a temporary delay that is a necessary part of the process.

Capitalisation ceases when substantially all the activities necessary to prepare the asset for its intended use or sale are complete.

The amount capitalised depends on the source of the funds:

Source	Amount to capitalise
Specific borrowing	Actual borrowing costs incurred on that borrowing, less any investment income on the temporary investment of those funds
General borrowings	Capitalisation rate x weighted average expenditures on the asset, where the rate is the weighted average of the borrowing costs on general borrowings outstanding

Two limits apply. Investment income is deducted only for specific borrowings, never for general ones. And the total amount capitalised may not exceed the total borrowing costs actually incurred during the period.

How this appears in the exam

• An asset reclassified to held for sale mid-year. Depreciate up to the date of classification, then measure at the lower of that carrying amount and fair value less costs to sell, then stop depreciating.
• A held-for-sale asset whose fair value less costs to sell later recovers. The gain is capped at the cumulative impairment previously recognised.
• A component sold during the year that is a separate major line of business. Present its post-tax result and the post-tax gain on disposal as one line, and re-present the comparative.
• A construction financed partly by a specific loan with idle funds temporarily invested, and partly by general borrowings. Deduct the investment income from the specific loan only, then apply the capitalisation rate to the remaining weighted average expenditures.

Common traps

• Continuing to depreciate an asset held for sale. Depreciation stops at classification.
• Classifying an asset to be abandoned as held for sale. Abandonment recovers value through use, not sale.
• Reversing an impairment above the original carrying amount. The gain is limited to cumulative impairment losses previously recognised.
• Deducting investment income earned on general borrowings. Only income from the temporary investment of specific borrowings reduces the amount capitalised.
• Capitalising more than was incurred. The total capitalised is capped at actual borrowing costs for the period.
• Presenting a discontinued operation gross. It is a single post-tax amount on the face of profit or loss.

Worked examples

Example 1: classification and measurement under PFRS 5

Zambales Resorts owns a building carried at P10,000,000 cost with P4,000,000 accumulated depreciation on 1 January 20x5, a remaining useful life of 6 years, straight line, no residual value. On 1 July 20x5 the board commits to a plan to sell, an agent is engaged, the building is marketed at a reasonable price, and a sale within a year is expected.

At 1 July the fair value less costs to sell is P5,200,000. At 31 December 20x5 the building is unsold and its fair value less costs to sell has risen to P5,900,000.

Step 1: depreciate up to the classification date. Annual depreciation = P6,000,000 / 6 = P1,000,000, so six months is P500,000.

Carrying amount at 1 July = P6,000,000 - P500,000 = P5,500,000

Step 2: apply the held-for-sale measurement.

Lower of carrying amount P5,500,000 and fair value less costs to sell P5,200,000 = P5,200,000

Impairment loss = P5,500,000 - P5,200,000 = P300,000, recognised in profit or loss.

Step 3: 31 December. No depreciation is recognised from 1 July onwards. Fair value less costs to sell has risen to P5,900,000, an increase of P700,000 over the P5,200,000 carrying amount.

The gain is limited to the cumulative impairment loss previously recognised, which is P300,000. So a gain of P300,000 is recognised and the building is carried at P5,500,000, not P5,900,000.

The building is presented as a current asset, separately from other assets.

Example 2: a discontinued operation

Zambales also operates a separate hotel division, a major line of business, which it sells on 30 September 20x5. For the nine months to disposal the division earned a pre-tax profit of P2,000,000. The disposal produced a pre-tax gain of P5,000,000. The tax rate is 25%.

Presented on the face of profit or loss as one line:

Post-tax profit of the discontinued operation, P2,000,000 x 0.75	1,500,000
Post-tax gain on disposal, P5,000,000 x 0.75	3,750,000
Profit from discontinued operations	5,250,000

The revenue and expenses of the hotel division do not appear line by line among continuing operations, and the prior year's statement is re-presented to show the division as discontinued as well.

Example 3: borrowing costs, specific and general

Pangasinan Cement builds a plant, a qualifying asset, throughout 20x5.

• A specific loan of P10,000,000 at 8% was drawn on 1 January solely for the plant. Funds not yet needed were temporarily invested and earned P150,000.
• General borrowings outstanding all year: P6,000,000 at 10% and P4,000,000 at 12%.
• Weighted average expenditures on the plant in excess of the specific loan were P3,000,000.

Specific borrowing.

Actual borrowing cost = 8% x P10,000,000 = P800,000

Less investment income on the temporary investment = (P150,000)

Capitalised from the specific loan = P650,000

General borrowings: the capitalisation rate.

Borrowing	Principal	Rate	Cost
Loan A	6,000,000	10%	600,000
Loan B	4,000,000	12%	480,000
Total	10,000,000		1,080,000

Capitalisation rate = P1,080,000 / P10,000,000 = 10.8%

Capitalised from general borrowings = 10.8% x P3,000,000 = P324,000

Note that no investment income is deducted here, even if the general funds happened to earn some.

Total capitalised = P650,000 + P324,000 = P974,000

The cap. Total borrowing costs actually incurred = P800,000 + P1,080,000 = P1,880,000. Since P974,000 does not exceed that, the full amount is capitalised. The remainder, P1,880,000 - P974,000 = P906,000, is recognised as interest expense.

Quick review

• Held for sale requires the asset to be available for immediate sale in its present condition and the sale to be highly probable: committed plan, active programme, active marketing at a reasonable price, expected completion within one year, and significant changes unlikely.
• Measure at the lower of carrying amount and fair value less costs to sell, after first bringing the carrying amount up to date under the previously applicable standard. Stop depreciating. Present separately, ordinarily as current.
• A later gain is capped at the cumulative impairment previously recognised. An asset to be abandoned is never held for sale.
• A discontinued operation is a separate major line of business or geographical area, or a subsidiary acquired exclusively for resale. Present as a single post-tax amount and re-present comparatives.
• Capitalise borrowing costs on a qualifying asset, one that necessarily takes a substantial period to get ready. Begin when expenditures, borrowing costs, and preparatory activities all exist; suspend during extended interruptions; cease when substantially all activities are complete.
• Specific borrowing: actual cost less investment income on temporary investment. General borrowings: capitalisation rate x weighted average expenditures, with no deduction for investment income. Total capitalised never exceeds borrowing costs actually incurred.