What it means
The standard has two linked parts. The first deals with assets, or groups of assets and liabilities, that will be recovered mainly through a sale.
The second deals with discontinued operations, which are major parts of a business that have been disposed of or are held for sale, such as a separate line of business or a major geographical area. For assets held for sale, the standard requires measurement at the lower of carrying amount and fair value less costs to sell, and it stops depreciation.
The assets are shown separately in the balance sheet, so readers can see what is leaving. Strict criteria must be met before the classification applies, including management commitment and a sale that is highly probable within roughly a year.
For discontinued operations, the standard requires a single amount on the face of the income statement. That amount combines the post-tax profit or loss of the discontinued operation with the post-tax gain or loss on remeasuring or disposing of its assets.
A detailed breakdown of revenue, expenses and tax is given in the notes. Comparative figures are restated.
When a business is classified as discontinued, the prior-year income statement is also reworked to show the same business separately, so that continuing results are comparable across years. The balance sheet comparatives, however, are not restated for the held for sale classification.
This presentation gives users a cleaner picture of the continuing business. A group that has sold off a loss-making division will show an improved set of continuing results, with the loss of the sold unit shown on its own line.
Analysts rely on this to forecast future earnings based on what is left. There are boundary issues that cause debate.
Not every closed branch or product line is a discontinued operation, since the standard requires a major line of business or geographical area. Management must decide whether a disposal meets this test, and the judgement is often examined by auditors and regulators.
In practice
Real-world examples
Example 1
A retail group decides to sell its entire online grocery business, which is a separate major line. The results are presented as a discontinued operation, and the prior-year income statement is restated to match.
Example 2
A pharmaceutical company agrees to sell a factory but will carry on the same product range elsewhere. The factory is classified as held for sale, but it is not a discontinued operation, because the line of business continues.
Example 3
A conglomerate closes down a division in a particular country that represented a major geographical area of its business. The division's results are shown on one line as discontinued, with details in the notes.
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
Profit or loss from discontinued operations = post-tax result of the operation + post-tax gain or loss on remeasurement or disposal
Suppose a group is selling its packaging division. The division earned a post-tax operating profit of $120,000 in the year. On classifying it as held for sale, the group wrote its assets down to fair value less costs to sell, producing a post-tax loss on remeasurement of $300,000. The single amount shown on the face of the income statement is 120,000 - 300,000 = a loss of $180,000.Case study
Seen in the real world
Redstone Holdings is an illustrative, fictional group that announced the sale of its hotel division, which had made losses for three years. In the financial statements, the finance team reported continuing operations separately from the hotel division, which was shown as one line, a loss after tax of $2,600,000.
Without the separate presentation, the group's overall profit would have appeared to be $1,100,000, below expectations. With it, continuing operations showed a profit of $3,700,000, and the loss from discontinued operations of $2,600,000 reduced the total to the same $1,100,000.
Investors focused on the $3,700,000 continuing profit when valuing the group. The illustrative lesson is that IFRS 5 separates the business that will stay from the business that is leaving, and that separation shapes how the market judges the future.
Watch out
Common mistakes
- Treating every disposal as a discontinued operation, when the standard requires a major line of business or geographical area.
- Continuing to depreciate assets after they are classified as held for sale, which breaches the measurement rules.
- Forgetting to restate the prior-year income statement, which leaves continuing results that cannot be compared across years.
Questions
People also ask
What is the difference between held for sale and discontinued operations?
Held for sale concerns the classification and measurement of assets about to be sold, while discontinued operations concern how the results of a major business line are presented.
Is the balance sheet comparative restated under IFRS 5?
No, the prior-year balance sheet is not reclassified, although the income statement comparatives are restated for discontinued operations.
What is the time limit for a sale to qualify?
The sale should be highly probable and expected to complete within about one year of classification, with limited exceptions for delays outside the company's control.