What it means
When a company decides to sell a major factory, a division, or a group of assets, those items change character. Instead of being used to generate ongoing business, they are now waiting for a buyer.
IFRS 5 requires businesses to label these items as held for sale on their balance sheets. This stops normal operations from mixing with items that are about to leave the company.
Why does this matter? Imagine looking at a bakery's financial reports.
If their main oven is listed as a normal operating asset, you might think the business is fully equipped for the future. But if that oven is actually under contract to be sold next week, the business will look very different tomorrow.
IFRS 5 prevents these nasty surprises by segregating the assets. Another key part of IFRS 5 is how profit is reported.
The financial results of a division up for sale are moved into a separate line item called discontinued operations. This allows investors to see exactly how much money the core business is making, without the noise of the unit being sold.
In practice, applying IFRS 5 means stopping depreciation on the assets once they meet specific criteria, like being actively marketed at a reasonable price and likely to sell within a year. It forces management to be transparent about restructuring plans and asset disposals.
In practice
Real-world examples.
Example
Techstart decided to sell its legacy hardware division to focus entirely on software. Under IFRS 5, they reclassified the division as held for sale, separating its $500,000 in equipment from their core tech assets.
Example
Metro Retail planned to close and sell one of its five shops. Management listed the property and remaining stock as held for sale under IFRS 5, separating the shop's financial results from the four continuing stores.
Example
GreenEnergy Ltd built a wind turbine farm with the explicit intent to sell it immediately upon completion. They applied IFRS 5 so investors could see the project was inventory for sale, not long-term infrastructure.
Think of it
“Think of putting your family car up for sale and parking it on the driveway with a for sale sign. You stop taking it on long family holidays, and you budget for its departure. It is still yours, but it is no longer part of your daily transport plans.
Formula
Calculation
Measurement = Lower of (Carrying Amount vs Fair Value less Costs to Sell)
Example: An asset is valued on the books at 100,000 pounds. Its market value is 90,000 pounds, and selling costs are 5,000 pounds.
Fair Value less Costs = 90,000 - 5,000 = 85,000 pounds.
Carrying Amount (100,000) is higher, so write down the asset to 85,000 pounds and record a 15,000 pound impairment loss.Case study
Seen in the real world.
Brighton Logistics decided to sell its regional delivery fleet to focus on international freight. The fleet had a book value of 1.2 million pounds on the balance sheet. Management signed an agreement with a buyer to sell the fleet for 1 million pounds, with estimated legal and selling fees of 50,000 pounds. Under IFRS 5, Brighton Logistics had to reclassify the fleet as held for sale. First, they tested the asset value. The carrying amount of 1.2 million pounds was compared to the net selling price of 950,000 pounds (1 million minus 50,000 pounds). Because the net selling price was lower, they had to write down the asset value by 250,000 pounds immediately, recording this loss in their income statement. Furthermore, the operational profits and losses of the delivery fleet were removed from normal operating expenses and placed into a single line item for discontinued operations. This gave shareholders a clear view of how much profit the core international freight business generated without the distraction of the departing delivery fleet.
Watch out
Common mistakes.
- Continuing to calculate depreciation on assets after they have been classified as held for sale.
- Applying IFRS 5 rules before a sale is genuinely committed to and actively marketed.
- Failing to separate the financial results of the discontinued operation from ongoing business activities.
Questions
People also ask.
What happens to depreciation when an asset is held for sale?
Depreciation stops immediately. Once an asset is destined for sale rather than use, it is no longer worn out through business operations in the eyes of accounting rules.
Can a company change its mind and take an asset off the held for sale list?
Yes. If the sale falls through, the asset goes back to being a normal operating asset, and you must calculate what its value would have been had it never been classified for sale.
Does IFRS 5 apply to small businesses?
Yes, IFRS 5 applies to any company following full International Financial Reporting Standards, regardless of size, if they have non-current assets or disposal groups held for sale.
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