What it means
The label is only applied when strict conditions are met. Management must be committed to a plan to sell, the asset must be available for immediate sale in its present condition, a buyer must be actively sought at a reasonable price, and the sale should be expected to complete within about a year.
A vague intention to sell one day does not count. The effect on the accounts is immediate.
The asset is moved out of property, plant and equipment, or wherever it was shown, and into a separate current line on the balance sheet, together with any liabilities that will go with it. Depreciation stops from the date of classification, because the value is to be recovered by sale rather than by use.
Measurement follows a prudent rule. The asset is carried at the lower of its existing carrying amount and its fair value less costs to sell, which are the extra costs directly caused by the sale, such as agent fees and legal costs.
If the fair value less costs to sell is lower, the company records an impairment loss straight away, even though no sale has yet happened. If the carrying amount is lower, nothing changes except that depreciation ceases.
Gains are not recognised before the sale, so an asset is never written up above what it was recorded at just because the market price is higher. This asymmetry is deliberate and keeps profit from being flattered by expected gains.
The classification matters to anyone reading accounts. Held for sale assets are no longer part of the operating base, so analysts remove them when judging the ongoing business, and lenders watch them because the proceeds may be used to repay debt.
A large held for sale balance can also be a signal of restructuring. If the plan changes, for example because no acceptable buyer is found, the asset is reclassified back to its previous category.
At that point it is measured at the lower of its original carrying amount adjusted for the depreciation that would have been charged, and its recoverable amount.
In practice
Real-world examples
Example 1
A retail chain agrees to close its smallest distribution centre and signs a mandate with an agent. Once the building is available for immediate sale at a realistic price, it is reclassified as held for sale and its monthly depreciation of $15,000 stops.
Example 2
A manufacturer decides to sell a subsidiary that makes components. The subsidiary's assets and its liabilities are shown as a disposal group on separate lines of the balance sheet, so investors can see the remaining business more clearly.
Example 3
A property company intends to sell an office building but also plans to refurbish it first. Because the building is not available for immediate sale in its present condition, it cannot yet be classified as held for sale.
Think of it
Imagine you own a family car that you drive to work every day. You maintain it and expect it to lose value over time. One day, you decide to buy a bicycle and put the car on Autotrader. From that moment, you stop tracking its wear and tear for daily commuting; your only focus is getting it ready for the buyer.
Formula
Calculation
Held for sale carrying amount = lower of (carrying amount, fair value - costs to sell)
Suppose a company decides to sell a warehouse recorded at a carrying amount of $900,000. An agent values it at a fair value of $850,000, and the costs of selling, such as agent fees and legal fees, are expected to be $30,000. Fair value less costs to sell is 850,000 - 30,000 = $820,000. The lower figure is $820,000, so the warehouse is shown at that amount and an impairment loss of 900,000 - 820,000 = $80,000 is recorded in profit.Case study
Seen in the real world
Marlow Industrial Holdings is an illustrative, fictional manufacturer that announced it would sell its coating division. At the year end, the division's net assets had a carrying amount of $14,000,000, while the best offer implied a fair value of $12,500,000, and selling costs were estimated at $400,000.
The finance director classified the division as held for sale, which meant measuring it at 12,500,000 - 400,000 = $12,100,000 and recording a $1,900,000 impairment loss. Some board members objected that the sale had not completed, but the accounting rules require the loss to be recognised as soon as the sale is expected.
The illustrative lesson is that held for sale accounting brings bad news forward. Investors saw the loss in the year the decision was made, not in the year the cheque arrived.
Watch out
Common mistakes
- Continuing to depreciate an asset that meets the held for sale criteria, which understates its carrying amount and profit.
- Classifying an asset as held for sale on the basis of a general intention, when the criteria require an active plan, a realistic price and a sale expected within about a year.
- Writing an asset up to a higher offer price before the sale completes, when gains are not recognised until the transaction occurs.
Questions
People also ask
Does an asset held for sale still get depreciated?
No, depreciation stops from the date the asset is classified as held for sale.
Where do held for sale assets appear on the balance sheet?
They are shown on a separate line, usually in current assets, with any related liabilities shown separately in liabilities.
What happens if the sale does not go ahead?
The asset is moved back to its previous classification and measured at the lower of its adjusted original carrying amount and its recoverable amount.