What if the sale extends beyond one year?

Non-current assets

ED 79 acknowledges that  events and circumstances could result in the sale being extended beyond one year. An entity continues to classify the asset as held for sale if the delay is caused by events and circumstances beyond the entity’s control. However, there needs to be sufficient evidence that the entity remains committed to its plan to sell the asset. The exception to the one-year requirement applies when:

• at the date that an entity commits itself to a plan to sell the asset, it reasonably expects that others (other than the buyer) will impose conditions on the transfer of the asset. For example, an entity is committed to selling a power generating facility, but the sale requires regulatory approval when the buyer is known. Actions necessary to obtain the required approval cannot be initiated until a buyer is known and a firm purchase commitment is obtained. If the entity remains committed to selling the power generating facility, it continues to classify the facility as held for sale even if the period required to obtain the regulatory approval extends beyond one year;
• an entity receives a firm commitment, but others, including the buyer, unexpectedly impose conditions on the transfer. For example, a municipality intends to sell land previously operated as a landfill site to a private party. After a firm purchase commitment is obtained, the buyer’s inspection of the land identifies environmental damage that was not known to exist. As the municipality must make good the damage, the period necessary to complete the sale will extend beyond one year. However, as the municipality has timely initiated actions to respond to the conditions to make good the damage, and a favourable resolution is expected, the asset can continue to be classified as held for sale; or
• during the initial one year period, circumstances arise that were previously considered unlikely, and as a result, the asset is not sold within the one year. For example, during the initial one year period, the market conditions that existed at the date the building was classified as held for sale deteriorated. As a result, the building is not sold by the end of the one year. The entity, however, actively solicited but did not receive any reasonable offers to purchase the building. The entity responds to the change in circumstances and actively markets the building at a lower price. As the building continues to be marketed actively at a reasonable price, the building can continue to be classified as held for sale.

When can an asset be classified as held for sale?

ED 79 sets out the accounting for non-current assets and disposal groups (hereafter referred to as “the asset”) whose carrying amount will be recovered principally through a sale transaction. A disposal group comprise a group of assets, and any directly associated liabilities, that will be disposed of through sale, together as a group, in a single transaction.

For an asset to be recovered principally through a sale transaction, it needs to be available for immediate sale in its present condition, subject to  usual and customary terms for the sales of such assets. The sale should also be highly probable. For a sale to be highly probable:

• the appropriate level of management is committed to the sale of the asset;
• an active programme is in place to locate a buyer and a complete the selling plan that is initiated;
• the asset is actively marketed at a price that is reasonable in relation to its current fair value; and
• the sale is expected to be completed within one year from the date the asset is classified as held for sale.

When these criteria are met, the asset is presented separately from other assets in the statement of financial position and measured at the lower of its carrying amount and fair value less costs to sell.

International guidance on non-current assets made available for sale

No IPSAS currently provides guidance on how to account for non-current assets that an entity holds for sale. The IPSASB issued ED 79 on Proposed IPSAS on Non-current Assets Held for Sale and Discontinued Operations to fill this gap. ED 79, which is an alignment project with IFRS 5 on Non-current Assets Held for Sale and Discontinued Operations, was published locally by the Board as ED 191.

How to provide comment on the ED

The Secretariat will host a roundtable discussion during September 2021 that will give participants an opportunity to share their comments and views and provide any other feedback on the IPSASB’s proposals. This feedback will be used to formulate a comment letter to the IPSASB. If you are interested in attending this session, please contact amandab@asb.co.za.

ED 79 is published on the ASB’s website and can be accessed here. The IPSASB’s webcast can be accessed by following this link.

Comment can be submitted to the Secretariat of the ASB at info@asb.co.za, by 1 October 2021.

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.