IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations
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Sai Manikanta Pedamallu
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IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
IFRS 5 covers two related but distinct accounting events: an asset that is about to be sold, and an operation that is being shut down or divested. The two topics share a standard because disposal is often the mechanism connecting them, but the accounting consequences are different and the thresholds for triggering each are not the same.
For held-for-sale assets, the issue is measurement and presentation: stop depreciating, remeasure to the lower of carrying amount and fair value less costs to sell, and show the asset separately on the balance sheet. For discontinued operations, the issue is income statement presentation: separate the results of the operation being exited from the continuing business, so that investors can assess the going-forward earnings power without the noise of a business that will not be there next year.
Both areas are consistently examined in Dip IFRS and both appear regularly in Indian corporate reporting, from infrastructure companies rationalising assets to conglomerates disposing of non-core businesses.
Part 1: Non-Current Assets Held for Sale
The Classification Test
A non-current asset (or disposal group) is classified as held for sale when its carrying amount will be recovered principally through a sale transaction rather than through continuing use.
Two conditions must both be met:
The asset is available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets. An asset cannot be classified as held for sale if significant modifications, repairs, or regulatory approvals are required before it can be sold. If a factory needs two years of environmental remediation before a buyer would accept it, it is not available for immediate sale.
The sale is highly probable. Highly probable is a higher threshold than probable. IFRS 5 specifies that for the sale to be highly probable:
Management at the appropriate level must be committed to a plan to sell the asset. An active programme to locate a buyer must have been initiated. The asset must be actively marketed at a price that is reasonable in relation to its current fair value. The sale is expected to be completed within one year from the date of classification. Significant changes to the plan or withdrawal of the plan are unlikely.
All five elements must be present simultaneously. A management discussion about potentially selling a division does not meet the threshold. A board-approved divestment plan with appointed advisers and an active data room process does.
The One-Year Rule and Its Exceptions
The one-year completion requirement is often misunderstood. It is not a one-year deadline from the balance sheet date; it is one year from the date of classification as held for sale. If an asset is classified on 1 July 2024, the sale must complete by 30 June 2025 for the classification to be maintained without exception.
Three exceptions exist where the sale can extend beyond one year without losing held-for-sale classification, provided the delay is caused by events beyond the entity's control and the entity remains committed to the sale:
A buyer imposes unexpected conditions that require regulatory approval, and the approval process extends beyond one year. The entity receives an unexpectedly low offer, rejects it, and actively re-markets at a higher price. Unusual, unforeseen circumstances cause the delay.
Regulatory or competitive developments blocking a planned divestiture are common in Indian conglomerate disposals. A strategic divestment requiring CCI (Competition Commission of India) approval can easily take 12 to 18 months. Provided the entity continues to actively market and remains committed, the held-for-sale classification is maintained.
What Gets Reclassified
The concept of a disposal group is important. When a group of assets and associated liabilities will be sold together in a single transaction, the entire group is classified as held for sale, not just the assets individually. A subsidiary whose shares will be sold is a disposal group: its assets and liabilities transfer to the buyer together.
The disposal group is measured at the lower of its aggregate carrying amount and fair value less costs to sell. Assets within the disposal group are not individually tested; the group is tested as a whole.
Measurement: Lower of Carrying Amount and Fair Value Less Costs to Sell
Immediately before classification as held for sale, the asset is measured under its applicable standard for the last time. An IAS 16 asset is remeasured under IAS 16 depreciation mechanics. An IAS 36 impairment test is performed if indicators exist. This brings the carrying amount to the most current value before IFRS 5 takes over.
After classification, the asset is measured at the lower of:
Carrying amount at the date of classification (already updated by the pre-classification measurement), and fair value less costs to sell.
Fair value is determined under IFRS 13. Costs to sell are incremental costs directly attributable to the disposal: broker commissions, legal fees for the sale contract, stamp duties on disposal. They exclude finance costs and income tax. General overhead allocated to the disposal process is not a cost to sell.
If fair value less costs to sell is below carrying amount, the shortfall is an impairment loss recognised in profit or loss at the date of classification.
Worked Example: Factory Held for Sale
Tata Steel decides on 1 October 2024 to sell a manufacturing plant. The decision is board-approved, an investment bank has been appointed, and the plant is ready for sale in its current condition.
Plant carrying amount at 1 October 2024 (after depreciation to that date): Rs. 85 crore
Fair value at 1 October 2024: Rs. 90 crore
Estimated costs to sell (broker fees, legal): Rs. 4 crore
Fair value less costs to sell: Rs. 90 – Rs. 4 = Rs. 86 crore
Lower of carrying amount (Rs. 85 crore) and fair value less costs to sell (Rs. 86 crore): Rs. 85 crore
No impairment loss arises at classification. The plant is reclassified from PPE to current assets at Rs. 85 crore.
Subsequent remeasurement at 31 March 2025 (next reporting date):
Fair value has fallen to Rs. 80 crore. Costs to sell remain Rs. 4 crore.
Fair value less costs to sell: Rs. 76 crore.
Carrying amount (unchanged since no depreciation is charged after classification): Rs. 85 crore.
Impairment loss recognised: Rs. 85 – Rs. 76 = Rs. 9 crore in profit or loss.
The plant is now carried at Rs. 76 crore in current assets.
If fair value subsequently recovers to Rs. 82 crore:
Fair value less costs to sell: Rs. 78 crore.
Previous impairment recognised: Rs. 9 crore.
Gain limited to Rs. 9 crore (cannot exceed cumulative impairment losses under IFRS 5).
Gain recognised: Rs. 78 – Rs. 76 = Rs. 2 crore (limited to the lesser of the recovery and the cumulative impairment).
The reversal cap is critical: recoveries under IFRS 5 are limited to cumulative impairment losses previously recognised under IFRS 5 and IAS 36 on that asset. An asset cannot be written back above its original carrying amount at classification.
Depreciation Ceases
From the date of held-for-sale classification, depreciation and amortisation cease. The asset is no longer expected to generate future economic benefits through use; it will be recovered through sale. Charging depreciation after this point would misstate both profit or loss and the carrying amount used in the lower-of test.
Balance Sheet Presentation
Assets classified as held for sale are presented separately on the face of the balance sheet within current assets, regardless of their original classification (they were previously non-current). The liabilities of a disposal group are presented separately within current liabilities.
Comparative periods are not restated. A disposal group classified as held for sale on 31 March 2025 appears in the current assets of the March 2025 balance sheet but not in the comparative March 2024 balance sheet.
Assets Excluded from IFRS 5 Measurement (but Still Presented Separately)
Certain assets within a disposal group are excluded from IFRS 5's lower-of measurement but are still presented separately as held for sale. These assets continue to be measured under their own standards:
Deferred tax assets (IAS 12). Financial assets within IFRS 9 scope. Employee benefit assets (IAS 19). Investment properties measured under the fair value model (IAS 40). Biological assets measured at fair value less costs to sell (IAS 41).
For a disposal group containing a mix of assets, the IFRS 5 lower-of test applies to the non-excluded assets, while the excluded assets are measured under their own standards. The excluded assets are still presented within the held-for-sale current asset line.
Part 2: Discontinued Operations
The Definition
A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale, and meets one of three criteria:
It represents a separate major line of business or geographical area of operations. It is part of a single coordinated plan to dispose of a separate major line of business or geographical area. It is a subsidiary acquired exclusively with a view to resale.
"Component" means a part of an entity with operations and cash flows that can be clearly distinguished from the rest of the entity, operationally and for financial reporting purposes.
The "major" threshold is where judgment concentrates. Selling a factory within a continuing manufacturing division is not a discontinued operation: the factory is not a separate major line of business. Selling the entire manufacturing division, retaining only trading and distribution, is a discontinued operation.
What Is Not a Discontinued Operation
Abandoning a product line within a segment. Closing a few underperforming stores within a continuing retail division. Relocating operations from one city to another.
These are restructuring events, accounted for under IAS 37 provisions and standard P&L presentation. They do not meet the "separate major line of business or geographical area" threshold.
Indian Context: When the Threshold Gets Tested
Tata Motors's sale of Jaguar Land Rover would represent a sale of a separate major geographical area and line of business, qualifying as a discontinued operation. Selling a single UK assembly plant would not.
Reliance Industries divesting its retail media business while retaining everything else in retail: the judgment depends on whether the disposed division constitutes a separate major line. If retail media generates 30% of the segment's revenue and is operationally distinct, it likely qualifies.
Conglomerates demerging divisions (a common corporate restructuring in India) frequently trigger discontinued operation treatment. When Mahindra & Mahindra demerged its tech services division, the operations of that division during the period it was classified as held for sale (or until disposal) would be presented as discontinued.
Wipro's divestiture of its infrastructure engineering division, sold to Wipro Enterprises in 2022, was reported as a discontinued operation in its IFRS financial statements. The infrastructure engineering segment represented a distinct, separable business with its own revenue and cost base.
Income Statement Presentation
This is the most practically significant aspect of discontinued operations. The results of discontinued operations are presented as a single line item in the income statement, below profit from continuing operations.
The income statement structure:
Revenue (continuing operations)
Expenses (continuing operations)
Profit from continuing operations (before tax)
Income tax expense (continuing operations)
Profit from continuing operations (after tax)
Profit/(loss) from discontinued operations (after tax) – single line
Profit for the year
The single line for discontinued operations represents the post-tax profit or loss of the discontinued operation during the period, plus any post-tax gain or loss on remeasurement to fair value less costs to sell or on disposal.
In the notes (or on the face if the entity chooses), the single line is disaggregated into: revenue, expenses, pre-tax profit or loss, income tax expense, and the gain or loss on disposal.
Comparative Period Restatement
When a component is classified as a discontinued operation, the comparative period's income statement is restated to present that component's results as discontinued in the prior year as well. This ensures like-for-like comparison: the continuing operations in both the current year and the prior year represent the same business.
This restatement can be significant for Indian conglomerates with complex group structures. If a business segment that contributed 20% of prior year revenue is reclassified as discontinued in the current year, the prior year comparative income statement is restated to show only 80% in continuing operations.
The balance sheet comparative is not restated. Prior period balance sheets continue to show the assets and liabilities in their original classification.
Cash Flow Statement Presentation
IFRS 5 requires disclosure of the net cash flows from operating, investing, and financing activities of discontinued operations, either in the cash flow statement or in the notes.
Disposal Groups Acquired Exclusively with a View to Resale
When an entity acquires a subsidiary exclusively with the intention to sell it on, it is classified as held for sale at the acquisition date if the one-year requirement is met and the remaining criteria are highly probable to be met shortly after acquisition.
In consolidated financial statements, such a subsidiary is not fully consolidated line by line. It is recognised as a disposal group at the lower of fair value less costs to sell and its acquisition cost.
This is relevant for private equity-style acquisitions within Indian conglomerates: a holding company that acquires a small subsidiary specifically to restructure and sell it within 12 months applies IFRS 5 from the acquisition date rather than consolidating the subsidiary into the group's continuing operations.
Abandonment: What It Is Not
An abandoned asset or operation is not classified as held for sale. An entity that plans to abandon, rather than sell, an asset continues to use IFRS in its normal measurement basis until abandonment. At the date of abandonment, the carrying amount is written off.
A discontinued operation can arise through abandonment (as well as through sale), but the income statement presentation requirements for discontinued operations apply regardless of whether the component is abandoned or sold, provided the component meets the definition.
An entity cannot use abandonment as an alternative to meeting the held-for-sale criteria. "We plan to abandon this factory rather than sell it" does not create a held-for-sale asset. The factory stays in PPE, continues to depreciate, and is written off at abandonment.
Ind AS 105 vs IFRS 5: Key Differences
| Area | IFRS 5 | Ind AS 105 |
|---|---|---|
| Held-for-sale classification criteria | Same | Same |
| One-year requirement and exceptions | Same | Same |
| Measurement: lower of carrying amount and FVLCTS | Same | Same |
| Depreciation ceases on classification | Same | Same |
| Disposal group: assets and liabilities together | Same | Same |
| Discontinued operation definition | Same | Same |
| Income statement: single line for discontinued operations | Same | Same |
| Comparative restatement for discontinued operations | Same | Same |
| Balance sheet: presented as current, separately | Same | Same |
| Excluded assets from measurement (financial, deferred tax) | Same | Same |
| CCI approval delays extending one year | Not specifically addressed | Same; in practice, Indian regulatory approval timelines are a common reason for the one-year exception |
| Intragroup transactions in discontinued operations | IFRIC agenda discussion ongoing | Same; Indian conglomerate demergers create specific presentation questions |
What Big 4 Auditors Focus On
Highly probable assessment at the classification date. Auditors test whether the five elements of "highly probable" were all present at the date management claims to have classified the asset as held for sale. A classification backdated to a convenient date without contemporaneous evidence of all five elements is a significant audit risk. Board minutes, sale mandates, marketing materials, and price discussions must be contemporaneous.
One-year rule monitoring. For assets classified as held for sale in a prior period where the one-year deadline has passed, auditors assess whether the exception applies or whether the asset should be reclassified back to non-current. Reclassification requires remeasuring as if IFRS 5 had never applied, which involves reinstating depreciation for the periods the asset was held for sale.
Discontinued operation threshold. Auditors challenge whether a disposal meets the "separate major line of business or geographical area" threshold. A disposal that management labels as "discontinued" but that represents a relatively small or non-distinct portion of operations will be challenged on this threshold.
Comparative restatement completeness. For newly classified discontinued operations, auditors verify that the comparative period income statement has been restated to move the discontinued operation's results to the single-line presentation. Missing or incomplete comparative restatement is a presentation error.
Measurement of disposal groups. For disposal groups (rather than individual assets), auditors test whether all assets and associated liabilities have been identified and included, and whether the lower-of measurement has been correctly applied to the group as a whole rather than to individual assets.
Dip IFRS Exam Angle
IFRS 5 produces both classification/threshold questions and presentation questions in Dip IFRS. Many marks are lost on presentation rather than measurement.
Most tested areas:
Held-for-sale classification: given a scenario describing a planned sale, determine whether all conditions are met. The "available for immediate sale" and "highly probable" conditions both require assessment. Know the five elements of highly probable.
Measurement at classification: measure to lower of carrying amount and FVLCTS. Know that depreciation stops. Know the gain reversal cap.
Discontinued operation vs restructuring: given a scenario, determine whether the disposed component is a separate major line of business. Know that closing a few stores or abandoning a product line is not a discontinued operation.
Income statement presentation: present continuing and discontinued operations separately. Know that prior-year comparatives are restated for discontinued operations. The single-line after-tax presentation is the key IFRS 5 requirement.
Common traps:
Continuing to depreciate an asset after it is classified as held for sale. Depreciation stops at classification. An exam question that provides a full-year depreciation charge for an asset classified as held for sale mid-year requires pro-rating to the classification date only.
Restating the comparative balance sheet for held-for-sale assets. The balance sheet comparative is not restated. Only the income statement comparatives are restated for discontinued operations.
Classifying a small disposal as a discontinued operation. The "major line of business or geographical area" threshold is a genuine qualitative test. Selling a single factory or product line within a continuing division does not qualify.
Applying the gain reversal cap incorrectly. Recoveries of impairment losses on held-for-sale assets are limited to the cumulative impairment previously recognised under IFRS 5 and IAS 36 on that specific asset.
FAQ
Can a non-current asset be classified as held for sale even if the sale is conditional on shareholder approval?
Yes, provided shareholder approval is highly probable. If the asset sale requires shareholder approval at an upcoming general meeting where approval is virtually certain, the held-for-sale criteria can be met. The "available for immediate sale" condition requires that no significant pre-conditions for the sale remain other than customary ones; shareholder approval can be customary in certain jurisdictions.
What if the sale falls through after an asset is classified as held for sale?
The asset is reclassified back to non-current assets at the lower of: its carrying amount before it was classified as held for sale (adjusted for any depreciation or revaluation that would have been recognised if it had not been classified as held for sale), and its recoverable amount at the date of the decision not to sell. The difference is recognised in profit or loss from continuing operations.
Is a business unit sold for Rs. 1 automatically a discontinued operation?
No. The classification as a discontinued operation depends on whether the disposed component represents a separate major line of business or geographical area, not on the sale price. A major business sold for a token amount still qualifies; a minor business sold for a large gain may not.
Do Ind AS 105 requirements apply to the individual financial statements as well as consolidated?
Yes. IFRS 5 (and Ind AS 105) applies to both standalone and consolidated financial statements. A subsidiary classifying a factory as held for sale applies IFRS 5 in its own financial statements, regardless of the consolidated treatment.
How is goodwill treated when a disposal group is measured under IFRS 5?
Goodwill allocated to a disposal group is included in the disposal group's carrying amount and measured under the IFRS 5 lower-of test. The goodwill is not separately tested for impairment under IAS 36 once the disposal group is classified as held for sale; the IFRS 5 measurement incorporates goodwill in the overall group measurement.
Can a property measured at fair value under IAS 40 be classified as held for sale?
Yes, but IFRS 5's lower-of measurement does not apply to investment property measured at fair value under IAS 40. The investment property continues to be measured at fair value under IAS 40 even when classified as held for sale. It is still presented separately as held for sale on the balance sheet.
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This is Post 38 of the Global Fin X IFRS Series. Previous: IAS 38: R&D Costs, Software Capitalisation and Indian IT Sector. Next: Post 39: IAS 36 Impairment of Assets: Indicators, Recoverable Amount and VIU vs FVLCD.