EXPOSURE DRAFT
ED FRS DISPOSAL OF
NON-CURRENT ASSETS AND
PRESENTATION OF
DISCONTINUED OPERATIONS
Comments to be received by 24 September 2003
This exposure draft (ED) is a proposed new Financial Reporting Standard on Disposal of Non-Current Assets and Presentation of Discontinued Operations.
This ED should be read in the context of the Preface to Financial Reporting Standards published by the Council on Corporate Disclosure and Governance.
This ED is issued by the Council on Corporate Disclosure and Governance for comment only and does not necessarily represent the views of the Council.
Since this ED may be modified as a result of comments received, the Council on Corporate Disclosure and Governance would like to hear both from those who agree with the proposals contained in the ED and from those who do not.
Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, clearly explain the problem and provide a suggestion for alternative wording with supporting reasoning.
Comments should be submitted in writing, so as to be received by 24September 2003, preferably by email to: or addressed to:
Council on Corporate Disclosure and Governance
c/o Ministry of Finance
100 High Street #06-03
The Treasury
Singapore 179434
Fax: 6337 4134
Contents
INVITATION TO COMMENTpages 3-4
INTRODUCTION paragraphs IN1-5
[Draft] Financial Reporting Standard X
Disposal of Non-current Assets and
Presentation of Discontinued Operations
OBJECTIVE1
SCOPE 2-3
CLASSIFICATION OF NON-CURRENT ASSETS
AS HELD FOR SALE4-7
Non-current assets to be abandoned 6-7
MEASUREMENT OF A NON-CURRENT ASSET
(OR DISPOSAL GROUP) CLASSIFIED AS HELD FOR SALE8-20
Changes to a plan of sale 17-20
PRESENTATION AND DISCLOSURE21-30
Presenting discontinued operations 22-26
Gains or losses relating to continuing operations 27
Presentation of a non-current asset or disposal group classified
as held for sale 28
Additional disclosures 29-30
EFFECTIVE DATE 31
APPENDICES
ADEFINED TERMS pages13-14
BAPPLICATION SUPPLEMENTparagraphs B1-8
Classification of a non-current asset or disposal group
as held for saleB1-4
Meeting the held for sale criteria after the balance sheet dateB4
Impairment losses and subsequent increases in fair value
less costs to sell of assets that were previously revaluedB5-8
Subsequent impairment losses B7
Subsequent gains B8
CAMENDMENTS TO OTHER FRSsC1-13
IMPLEMENTATION GUIDANCE see separate booklet
INVITATION TO COMMENT
The Council on Corporate Disclosure and Governance invites comments on any aspect of this Exposure Draft of its proposed FRS Disposal of Non-current Assets and Presentation of Discontinued Operations. It would particularly welcome answers to the questions set out below. Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, contain a clear rationale, and, where applicable, provide a suggestion for alternative wording.
Comments should be submitted in writing so as to be received no later than 24 September 2003.
Question 1 – Classification of non-current assets held for sale
The Exposure Draft proposes that non-current assets should be classified as assets held for sale if specified criteria are met. (See paragraphs 4 and 5 and Appendix B.) Assets so classified may be required to be measured differently (see question 2) and presented separately (see question 7) from other non-current assets.
Does the separate classification of non-current assets held for sale enable additional information to be provided to users? Do you agree with the classification being made? If not, why not?
Question 2 – Measurement of non-current assets classified as held for sale
The Exposure Draft proposes that non-current assets classified as held for sale should be measured at the lower of carrying amount and fair value less costs to sell. It also proposes that non-current assets classified as held for sale should not be depreciated. (See paragraphs 8-16.)
Is this measurement basis appropriate for non-current assets classified as held for sale? If not, why not?
Question 3 – Disposal groups
The Exposure Draft proposes that assets and liabilities that are to be disposed of together in a single transaction should be treated as a disposal group. The measurement basis proposed for non-current assets classified as held for sale would be applied to the group as a whole and any resulting impairment loss would reduce the carrying amount of the non-current assets in the disposal group. (See paragraph 3.)
Is this appropriate? If not, why not?
Question 4 – Newly acquired assets
The Exposure Draft proposes that newly acquired assets that meet the criteria to be classified as held for sale should be measured at fair value less costs to sell on initial recognition (see paragraph 9). It therefore proposes a consequential amendment to [draft] FRS X Business Combinations (see paragraph C13 of Appendix C) so that non-current assets acquired as part of a business combination that meet the criteria to be classified as held for sale would be measured at fair value less costs to sell on initial recognition, rather than at fair value as currently required.
Is measurement at fair value less costs to sell on initial recognition appropriate? If not, why not?
Question 5 – Revalued assets
The Exposure Draft proposes that, for revalued assets, impairment losses arising from the write-down of assets (or disposal groups) to fair value less costs to sell (and subsequent gains) should be treated as revaluation decreases (and revaluation increases) in accordance with the standard under which the assets were revalued, except to the extent that the losses (or gains) arise from the recognition of costs to sell. Costs to sell and any subsequent changes in costs to sell are proposed to be recognised in the income statement. (See paragraphs B6-B8 of Appendix B.)
Is this appropriate? If not, why not?
Question 6 – Removal of the exemption from consolidation for subsidiaries acquired and held exclusively with a view to resale
The Exposure Draft proposes a consequential amendment to draft FRS 27 Consolidated and Separate Financial Statements to remove the exemption from consolidation for subsidiaries acquired and held exclusively with a view to resale. (See paragraph C3 of Appendix C.)
Is the removal of this exemption appropriate? If not, why not?
Question 7 – Presentation of non-current assets held for sale
The Exposure Draft proposes that non-current assets classified as held for sale, and assets and liabilities in a disposal group classified as held for sale, should be presented separately in the balance sheet. The assets and liabilities of a disposal group classified as held for sale should not be offset and presented as a single amount. (See paragraph 28.)
Is this presentation appropriate? If not, why not?
Question 8 – Classification as a discontinued operation
The Exposure Draft proposes that a discontinued operation should be a component of an entity that either has been disposed of, or is classified as held for sale, and:
(a)the operations and cash flows of that component have been, or will be, eliminated from the ongoing operations of the entity as a result of its disposal, and
(b)the entity will have no significant continuing involvement in that component after its disposal.
A component of an entity may be a cash-generating unit or any group of cash-generating units. (See paragraphs 22 and 23.)
These criteria could lead to relatively small units being classified as discontinued (subject to their materiality). Some entities may also regularly sell (and buy) operations that would be classified as discontinued operations, resulting in discontinued operations being presented every year. This, in turn, will lead to the comparatives being restated every year. Do you agree that this is appropriate? Would you prefer an amendment to the criteria, for example adding a requirement adapted from FRS 35 Discontinuing Operations that a discontinued operation shall be a separate major line of business or geographical area of operations, even though this would not converge with SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. How important is convergence in your preference?
Are the other aspects of these criteria for classification as a discontinued operation (for example, the elimination of the operations and cash flows) appropriate? If not, what criteria would you suggest, and why?
Question 9 – Presentation of a discontinued operation
The Exposure Draft proposes that the revenue, expenses, pre-tax profit or loss of discontinued operations and any related tax expense should be presented separately on the face of the income statement. (See paragraph 24.) An alternative approach would be to present a single amount, profit after tax, for discontinued operations on the face of the income statement with a breakdown into the above components given in the notes.
Which approach do you prefer, and why?
[Draft] Financial Reporting Standard X Disposal of Non-current Assets and Presentation of Discontinued Operations ([draft] FRS X) is set out in paragraphs 1-31 and Appendices A-C. All the paragraphs have equal authority. Paragraphs in boldtype state the main principles. Terms defined in Appendix A are in italics the first time they appear in the [draft] Standard. Definitions of other terms are given in the Glossary for Financial Reporting Standards. [Draft] FRS X should be read in the context of its objective, the Preface to Financial Reporting Standards and the Framework for the Preparation and Presentation of Financial Statements. These provide a basis for selecting and applying accounting policies in the absence of explicit guidance.INTRODUCTION
Reasons for issuing the [draft] FRS
IN1Convergence of accounting standards around the world is one of the prime objectives of the International Accounting Standards Board (IASB). To further that objective, the Board has agreed with the Financial Accounting Standards Board (FASB) in the United States a memorandum of understanding that sets out the two boards’ commitment to convergence. As a result of that understanding the boards have undertaken a joint short-term project that has the objective of reducing differences between IFRSs and US GAAP that are capable of resolution in a relatively short time and can be addressed outside current and planned major projects.
IN2One aspect of that project involves the two boards considering each other’s recent standards with a view to adopting recent high quality accounting solutions. The [draft] FRS arises from the consideration of the FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), issued in 2001.
IN3SFAS 144 addresses three areas: (i) the impairment of long-lived assets to be held and used, (ii) the classification, measurement and presentation of assets held for sale and (iii) the classification and presentation of discontinued operations. The impairment of long-lived assets to be held and used is an area where there are extensive differences between IFRSs and US GAAP. However, those differences were not thought capable of resolution in a relatively short time. Convergence on the other two areas was thought to be worth pursuing within the context of the short-term project.
IN4The [draft] FRS is based on the draft IFRS issued by the IASB, and which achieves substantial convergence with the requirements of SFAS 144 relating to assets held for sale and discontinued operations.
Main features of the [draft] FRS
IN5The [draft] FRS:
(a)adopts the classification ‘held for sale’ using the same criteria as those contained in SFAS 144;
(b)introduces the concept of a disposal group;
(c)specifies that assets or disposal groups that are classified as held for sale are carried at the lower of carrying amount and fair value less costs to sell;
(d)specifies that an asset classified as held for sale, or included within a disposal group that is classified as held for sale, is not depreciated;
(e)specifies that an asset classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale, are presented separately on the face of the balance sheet;
(f)withdraws FRS 35 Discontinuing Operations and replaces it with requirements that:
(i)change the definition of a discontinued operation from a separate major line of business or geographical area to any unit whose operations and cash flows can be clearly distinguished operationally and for financial reporting purposes.
(ii)change the timing of the classification as a discontinued operation. FRS 35 classifies an operation as discontinuing at the earlier of (a) the entity entering into a binding sale agreement and (b) the board of directors approving and announcing a formal disposal plan. The [draft] FRS classifies an operation as discontinued at the date the entity has actually disposed of the operation, or when the operation meets the criteria to be classified as held for sale.
(iii)present the results of discontinued operations separately on the face of the income statement.
(iv)prohibit the retroactive classification as a discontinued operation, when the discontinued criteria are met after the balance sheet date.
[DRAFT] FINANCIAL REPORTING STANDARD X
Disposal of Non-current Assets and
Presentation of Discontinued Operations
OBJECTIVE
1The objective of this [draft] FRS is to improve the information in financial statements about assets and disposal groups that are to be disposed of and discontinued operations. It seeks to do this by specifying (i) the measurement, presentation and disclosure of non-current assets and disposal groups to be disposed of and (ii) the presentation and disclosure of discontinued operations.
SCOPE
2This [draft] FRS applies to all recognised non-current assets of an entity, except:
(a)goodwill,
(b)deferred tax assets,
(c)financial assets included in the scope of FRS 39 Financial Instruments: Recognition and Measurement,
(d)assets arising from employee benefits, and
(e)financial assets arising under leases, and to disposal groups as set out in paragraph 3.
3Sometimes an entity disposes of a group of assets, possibly with some directly associated liabilities, together in a single transaction. Such a disposal group may be a group of cash-generating units, a single cash-generating unit, or part of a cash-generating unit. If a non-current asset covered by this [draft] FRS is part of a disposal group, the measurement requirements of this [draft] FRS apply to the group as a whole. The measurement of the individual assets and liabilities within the disposal group is set out in paragraphs 11 and 14.
CLASSIFICATION OF NON-CURRENT ASSETS AS HELD FOR SALE
4An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.
5Such a classification shall be required when and only when the criteria in Appendix B are met. Sale transactions include exchanges of non-current assets for other non-current assets.
Non-current assets to be abandoned
6Because its carrying amount will be recovered principally through continuing use, an entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned. However, if the disposal group to be abandoned is a component of an entity, the entity shall present the results and cash flows of the disposal group as discontinued operations in accordance with paragraph 24 at the date on which it ceases to be used.
7An entity shall not account for a non-current asset that has been temporarily taken out of use as if it had been abandoned.
MEASUREMENT OF A NON-CURRENT ASSET (OR DISPOSAL GROUP) CLASSIFIED AS HELD FOR SALE
8An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell.
9If a newly acquired asset (or disposal group) meets the criteria to be classified as held for sale (see paragraph B3 of Appendix B), it shall be measured on initial recognition at fair value less costs to sell.
10In the rare circumstances that the sale is expected to occur beyond one year, the entity shall measure the costs to sell at their present value.
11 The carrying amounts of any assets that are not covered by this [draft] FRS, including goodwill, but are included in a disposal group classified as held for sale, shall be measured in accordance with other applicable FRSs before the fair value less costs to sell of the disposal group is measured.
12For assets that, before classification as held for sale, have not been revalued under another FRS and for disposal groups that do not include any such revalued assets, an entity shall recognise:
(a)an impairment loss for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell; and
(b)a gain for any subsequent increase in fair value less costs to sell, but not in excess of the cumulative impairment loss that has been recognised either under this [draft] FRS or previously under FRS 36 Impairment of Assets.
13Paragraphs B5-B8 of Appendix B set out the requirements for the recognition of impairment losses and subsequent gains for assets that, before classification as held for sale, were measured at revalued amounts under another FRS and for disposal groups that include such revalued assets.
14The impairment loss (or any subsequent gain) recognised for a disposal group shall reduce (or increase) the carrying amount of the non-current assets in the group that are included in the scope of this [draft] FRS.
15A gain or loss not previously recognised by the time of the sale of a non-current asset (or disposal group) shall be recognised at the date of sale.
16An entity shall not depreciate (or amortise) a non-current asset while it is classified as held for sale or while it is part of a disposal group classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale shall continue to be recognised.
Changes to a plan of sale
17If an entity has classified an asset (or disposal group) as held for sale, but the criteria in Appendix B are no longer met, the entity shall cease to classify the asset (or disposal group) as held for sale.
18The entity shall measure a non-current asset that ceases to be classified as held for sale at the lower of its:
(a)carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation or amortisation that would have been recognised had the asset (or disposal group) not been classified as held for sale, and
(b)recoverable amount at the date of the subsequent decision not to sell.