Top 10 differences between IFRS 5 and ASC Subtopics 360-10 and 205-20.
From the IFRS Institute – September 7, 2023
Even before a company disposes of a group of assets or discontinues a major line of business or a geography, the financial statements may need to reflect the possible effects of the planned transaction. For example, when certain criteria are met, both IFRS Accounting Standards and US GAAP require that (1) assets and liabilities held-for-sale be presented separately on the balance sheet and (2) results and cash flows of discontinued operations be presented separately from those of continuing operations. These requirements are largely aligned, but differences exist.
When a company decides to dispose of a noncurrent asset or disposal group 2 (referred to as asset group) through a sale transaction rather than through continuing use, the asset group is assessed for held-for-sale classification until sold. Examples of asset groups include a plant, a subsidiary, an operating segment or a cash generating unit. Similarly, asset groups to be distributed to the company’s owners acting in their capacity as owners (e.g. in a spin off) are assessed for held-for-distribution classification.
An asset group is classified as held-for-sale (distribution) if it meets the following criteria.
a. the appropriate level of management is committed to a plan to sell;
b. an active program to locate a buyer and complete the plan to sell has been initiated;
c. the asset is being marketed for sale at a price that is reasonable in relation to its current fair value; and
d. actions required to complete the plan indicate that it’s unlikely that significant changes will be made or the plan will be withdrawn.
Once classified as held-for-sale (distribution), the asset group is subject to specific measurement, presentation, and disclosure requirements.
An asset group classified as held-for-sale (distribution) is measured at the lower of its carrying amount and fair value less costs to sell (distribute). This means that expected losses are generally recognized before the transaction closes, while gains are generally recognized at closing. Costs to sell (distribute) are incremental costs directly attributable to the transaction, excluding finance costs and income tax expense. Further, property, plant, equipment and intangible assets in the asset group are no longer depreciated or amortized.
From the date an asset group is classified as held-for-sale (distribution), its assets and liabilities are classified as current and presented separately from other assets and other liabilities on the balance sheet. Prior years are not adjusted to present the asset group as held-for-sale (distribution). Specific disclosure requirements also apply.
A discontinued operation is a component of a company that either has been disposed of or is classified as held-for-sale (distribution). It represents a separate major line of business or geographic area (or is part of a single plan to dispose of one), or a subsidiary acquired exclusively with a view to resale.
Classification of an asset group as discontinued operations occurs at the earlier of these two dates:
There are no recognition or measurement impacts from classifying operations as discontinued. However, discontinued operations will generally include asset groups held-for-sale (distribution), which follow the measurement requirements described above.
The results of discontinued operations are presented separately from continuing operations, as a single amount in the statement of profit or loss and other comprehensive income (OCI). An analysis of this single amount is provided either on the statement of profit or loss and OCI or in the notes to the financial statements. Net cash flow information attributable to operating, investing and financing activities of discontinued operations are disclosed, either on the statement of cash flows or in the notes.
The comparative statement of profit or loss and OCI and cash flow information are re-presented each period so that the comparative information includes all operations classified as discontinued at the current reporting date.
Although the guidance in IFRS 5 is quite similar to US GAAP (i.e. ASC Subtopics 205-20 and 360-10 3 ), there are some important differences regarding specific classification, measurement, presentation and disclosure requirements. Here, we highlight 10 of these differences.
Unlike IFRS 5, under US GAAP no special held-for-distribution designation exists. Instead, an asset group to be distributed to owners is treated as follows until distributed:
a. it continues to be classified as held-and-used;
b. its long-lived assets continue to be depreciated or amortized; and
c. its results continue to be presented in continuing operations. Once the distribution is complete, the results are presented separately as discontinued, if the appropriate criteria are met.
When assessing the magnitude of the effect of a disposal, the IFRS 5 definition of a discontinued operation focuses on whether it represents a separate major line of business or geographic area.
Unlike IFRS 5, US GAAP focuses on whether a disposal represents a strategic shift that has (or will have) a major effect on a company’s operations and financial results. The requirement for there to be a strategic shift under US GAAP presents a high hurdle as post-separation results must be qualitatively and quantitatively measured to qualify for discontinued operations classification. Yet, US GAAP includes the disposal of a major line of business or major geographic area as an example of a discontinued operations.
In practice, this assessment requires judgment and conclusions should be well documented. It is often a source of comments from the SEC staff to registrants.
Under both IFRS 5 and US GAAP certain assets in a held-for-sale (distribution) asset group are excluded from the held-for-sale measurement (i.e. lower of carrying amount and fair value less cost to sell). Instead, they remain measured under the guidance that normally applies to those assets. However, the list of excluded assets under IFRS 5 and US GAAP do not align.
| Asset type | Subject to held-for-sale (distribution) measurement under IFRS 5 | Subject to held-for-sale measurement under US GAAP |
|---|---|---|
| Employee benefit assets | No | Yes |
| Deferred tax assets | No | No |
| Financial instruments | No | No |
| Investment property measured at fair value | No | N/A |
| Deferred insurance policy acquisition costs | No | No |
| Insurance contracts | No | Yes |
| Goodwill | Yes | No |
| Equity-method investees | Yes | No |
| Servicing rights 4 | Yes | No |
| All other assets | Yes | Yes |
Under IFRS Accounting Standards, when an interest in an investee under significant influence meets the criteria to be classified as held-for-sale, it is measured under IFRS 5 and presented as held-for-sale (distribution). Equity accounting pursuant to IAS 28 5 cannot be applied.
Unlike IFRS 5, under US GAAP equity accounting continues to apply as long as the investor holds significant influence. Further, unlike IFRS 5, the interest is not presented as held-for-sale unless it also qualifies as a discontinued operation (i.e. represents a strategic shift).
Under both IFRS 5 and US GAAP an asset group classified as held-for-sale (or distribution under IFRS 5) is remeasured at the lower of carrying amount and fair value less costs to sell until its disposal. An increase in fair value less costs to sell may therefore result in a gain. The gain is limited to the cumulative amount of impairment losses previously recognized.
To determine the cumulative amount of impairment losses previously recognized, IFRS 5 considers impairment losses recognized in accordance with both the held-for-sale (distribution) guidance and the impairment standard (IAS 36) before the asset group was classified as held-for-sale (distribution). Impairment losses allocated to goodwill are included in determining the maximum gain that can be recognized.
Unlike IFRS 5, US GAAP only considers impairment losses recognized under the held-for-sale guidance. It is not possible to reverse impairment losses recognized before the asset group was classified as held-for-sale. This means that a higher amount of gain may be recorded before disposal under IFRS 5 because reversals of historical impairments, per IAS 36, are allowed.
Under both IFRS 5 and US GAAP when an asset group is no longer held for sale (or distribution under IFRS 5), it is reclassified as held-for-use and remeasured. Under IFRS 5 it is remeasured at the lower of its recoverable amount and the carrying amount it would have absent the held-for-sale (distribution) classification. This is the carrying amount before the asset group was classified as held-for-sale (distribution) adjusted for any depreciation, amortization or revaluations that would have been recognized had the asset remained classified as held-for-use.
Under US GAAP a long-lived asset that is reclassified is measured separately at the lower of its fair value at the date of the decision not to sell (unlike IFRS 5) and the carrying amount it would have absent the held-for-sale classification (like IFRS 5).
The recoverable amount under IFRS 5 is the higher of the asset group’s fair value less costs of disposal and the value in use. The recoverable amount may therefore differ from fair value under US GAAP, which may affect the amount of remeasurement gain or loss recorded on reclassification as held-for-use.
Under IFRS 5 the comparative balance sheet is not adjusted to reflect the presentation of assets held-for-sale (distribution) in the current period.
Under US GAAP, unlike IFRS 5, in the period that a discontinued operation is disposed of or classified as held-for-sale, the comparative balance sheet is adjusted to reflect that classification for all periods presented. Unlike IFRS 5, there is no specific guidance for held-for-sale assets groups that are not discontinued operations, and practice varies.
Like IFRS 5, under US GAAP cash flow information for discontinued operations is required to be disclosed. Unlike IFRS, under US GAAP the requirements to provide information by categories of cash flows (operating, investing and financing) for discontinued operations vary between private and public companies.
Under IFRS 5 certain disclosure (e.g. analysis of result and cash flow information) can be omitted when a newly acquired subsidiary is classified as held-for-sale (distribution) on acquisition.
Unlike IFRS 5, US GAAP provides no disclosure exemptions for a disposal group that is a newly acquired subsidiary classified as held-for-sale on acquisition.
Unlike IFRS 5, US GAAP requires specific disclosures about entities’ continuing involvement with discontinued operations and disposals of individually significant components that do not qualify as discontinued operations.
