Definition of Held-for-Sale
Held-for-sale is a classification used for non-current assets (or disposal groups) in accordance with International Accounting Standard (IAS) 5, Non-current Assets Held for Sale and Discontinued Operations. For an asset or group of assets to be classified as held-for-sale, it must be available for immediate sale in its present condition subject only to usual and customary terms, and the sale must be highly probable to be completed within one year from the date of classification.
Assets classified as held-for-sale are valued at the lower of their carrying amount and fair value less costs to sell, which is also known as their net realizable value. Importantly, these assets must be disclosed separately from other assets on the balance sheet, allowing for greater transparency and aiding in financial analysis.
Examples
- Real Estate: A company decides to sell an office building that is no longer in use. The building is immediately available for sale and the company expects to finalize the sale within 12 months.
- Machinery: A manufacturing firm plans to dispose of outdated machinery. The company classifies the machinery as held-for-sale, as it is ready for immediate sale and expects the transaction to close within the one-year timeframe.
Frequently Asked Questions (FAQs)
What conditions must be met for an asset to be classified as held-for-sale?
To classify an asset as held-for-sale, it must be available for immediate sale in its present condition and the sale must be highly probable to be completed within one year from the date of classification.
How should held-for-sale assets be valued on the balance sheet?
Held-for-sale assets should be valued at the lower of their carrying amount and fair value less costs to sell, also known as the net realizable value.
What happens if the sale of a held-for-sale asset is not completed within one year?
If the sale is not completed within one year, the asset should be reassessed. If the criteria for held-for-sale classification are no longer met, the asset should be reclassified and measured in accordance with normal accounting standards.
Do held-for-sale assets impact the income statement?
Indirectly, yes. Adjustments to fair value less costs to sell, and any impairment losses for held-for-sale assets, will affect the income statement as they represent changes in asset valuation.
What should be included in the disclosures for held-for-sale assets?
Disclosures should include a description of the non-current assets or disposal group, the facts and circumstances of the sale, the carrying amount, fair value less costs to sell, and any impairment losses recognized.
- Carrying Amount: The amount at which an asset is recognized in the balance sheet after deducting any accumulated depreciation and accumulated impairment losses.
- Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Net Realizable Value: The estimated selling price in the ordinary course of business minus the estimated costs of completion and the estimated costs necessary to make the sale.
- Discontinued Operations: Components of an entity that have been disposed of or classified as held for sale and represent a separate major line of business or geographical area of operations.
Online Resources
Suggested Books for Further Studies
- “International Financial Reporting Standards (IFRS) 2020” by the International Accounting Standards Board (IASB)
- “Financial Accounting and Reporting” by Barry Elliott, Jamie Elliott
- “Applying IFRS Standards” by Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Carol Rankin
Accounting Basics: “Held-for-Sale” Fundamentals Quiz
### What criteria must an asset meet to be classified as held-for-sale?
- [x] The asset must be available for immediate sale in its present condition.
- [ ] The asset must be sold within six months.
- [ ] The asset must be depreciated to zero value.
- [ ] The asset must belong to the manufacturing sector.
> **Explanation:** For an asset to be classified as held-for-sale, it must be available for immediate sale in its present condition, and the sale must be highly probable within one year.
### How should held-for-sale assets be valued on the balance sheet?
- [ ] At their historical cost.
- [x] At the lower of carrying amount and fair value less costs to sell.
- [ ] At their replacement cost.
- [ ] At their insurance value.
> **Explanation:** Held-for-sale assets should be valued at the lower of their carrying amount and fair value less costs to sell.
### How should adjustments to the fair value of held-for-sale assets be recognized?
- [x] As part of the income statement.
- [ ] Directly in equity.
- [ ] They should not be recognized.
- [ ] As part of other comprehensive income.
> **Explanation:** Adjustments to the fair value less costs to sell and any impairment losses for held-for-sale assets should be recognized as part of the income statement.
### What happens if the sale of a held-for-sale asset is not completed within one year?
- [ ] The sale must be extended.
- [x] The asset is reassessed and possibly reclassified.
- [ ] The asset must be written off.
- [ ] The asset remains classified as held-for-sale indefinitely.
> **Explanation:** If the sale is not completed within one year, the asset should be reassessed and, if necessary, reclassified according to the relevant accounting standards.
### Are assets classified as held-for-sale depreciable?
- [ ] Yes, they must continue to be depreciated as normal.
- [x] No, depreciation is suspended.
- [ ] Only if they are tangible assets.
- [ ] Only if their value exceeds a specific threshold.
> **Explanation:** Assets classified as held-for-sale are not depreciated. Depreciation is suspended for these assets because they are expected to be sold soon.
### Do held-for-sale assets require separate disclosure from other assets on the balance sheet?
- [x] Yes, they must be disclosed separately.
- [ ] No, they are included with other non-current assets.
- [ ] Only if their value is significant.
- [ ] Only if the company chooses to do so.
> **Explanation:** Held-for-sale assets must be disclosed separately from other assets on the balance sheet to provide transparency.
### Can an asset be classified as held-for-sale if the sale is not expected to be completed within one year?
- [ ] Yes, if the management is committed to selling it.
- [ ] Yes, if the delay is due to external factors.
- [x] No, the sale must be highly probable within one year.
- [ ] Yes, as long as it is a non-current asset.
> **Explanation:** An asset can only be classified as held-for-sale if the sale is highly probable to be completed within one year from the date of classification.
### What happens to impairment losses for held-for-sale assets?
- [x] They are recognized in the income statement.
- [ ] They are capitalized to the asset's value.
- [ ] They are only disclosed in notes.
- [ ] They are offset against reserves.
> **Explanation:** Impairment losses for held-for-sale assets are recognized in the income statement.
### What must be done if an asset no longer meets the held-for-sale criteria?
- [ ] Nothing, it remains held-for-sale.
- [x] It should be reclassified in the appropriate category.
- [ ] It must be written off.
- [ ] It should be sold at any cost.
> **Explanation:** If an asset no longer meets the held-for-sale criteria, it should be reclassified into the appropriate category and valued according to the relevant accounting standards.
### How does classifying an asset as held-for-sale affect the company's financial statements?
- [ ] It does not affect the financial statements.
- [x] It impacts the valuation and disclosure of assets.
- [ ] It only affects the income statement.
- [ ] It requires writing down the asset value immediately.
> **Explanation:** Classifying an asset as held-for-sale impacts the valuation and disclosure of the asset on the financial statements by requiring separate disclosure and possible revaluation at the lower of carrying amount and fair value less costs to sell.
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