The assets held for sale are the non-current assets that the business intends to sell. In other words, confirm the intention of the business to sell the non-current assets converts the presentation of the non-current assets to the current assets. This is the change of classification which brings changes in the implications of the accounting treatment on the assets. For instance, once an asset is classified as held for sale in the section of current assets, no depreciation is applied.
The company may commit to sale the group of assets instead of a single asset. However, the accounting treatment and presentation of the assets held for sale remain the same irrespective of whether it’s a single asset or a group of assets.
If the company decides to sell the business unit/disposal group, the assets and liabilities are netted off, and the disposal group is shown as a single line item in the section of current assets. So, there is no difference in reporting for the single asset or the disposal group.
Criteria to classify the assets as held for sale
The business can classify the assets as held for sale if the following criteria are met.
- The management is committed to a plan to sell the assets. The commitment is to be proved by identifying the asset classified as held for sale and setting an expected date to close the sales transaction.
- The asset to be sold is in the present condition. In other words, there is no need to incur modification costs in the assets to be sold.
- The business is actively looking for the buyer – an advertisement in the newspaper, active marketing, and discussion with different parties can prove an active buyer allocation program.
- The sale of the assets is probable and expected to complete within one year.
- The price demanded by the business is not unreasonably higher, and it’s more or less the same as the fair value of the assets.
- The business does not seem to withdraw its plan to sell the assets.
Accounting treatment – assets held for sale
The assets held for sale are valued at lower carrying value, and fair value less cost to sell. The carrying value is an amount after accumulated depreciation, impairment, and other charges are deducted from the recorded cost of the asset. Let’s understand the accounting treatment for measurement and recording of the assets held for sale.
Consider the asset’s cost is USD 25,000, accumulated depreciation amounts to USD 10,000, and the impairment amounts to USD 2,000. So, the carrying value would be USD 13,000 (25,000-10,000-2,000). On the other hand, the asset’s fair value is USD 18,000, and the sale cost is USD 2,000.
So, the carrying value amounts to USD 13,000, and the fair value after the sale cost is USD 16,000 (18,000-22,000). The asset held to sale would be recorded on USD 13,000 (carrying value), which is lower than the fair value of USD 18,000.
Difference between discontinued operations and assets held for sale
Discontinued operations is the term used when the business intends to sell part of the operations. It may be a product line, business unit, or some segment earning revenue and incurring expenses. However, the following criteria need to be met for classifications of assets as discontinued operations.
- The assets to be disposed of representing a major line of business. It may be geographical location, key market, business unit, or some product line.
- The business has a committed plan to sell the asset.
- The disposal will lead to the loss of control over the discontinued operations.
Frequently asked questions
Which of the assets can be classified as held for sale?
There must be the commitment of the management to sell the assets, and they should be actively looking for the buyer. The logic behind this classification is that the business will recover the carrying amount with the sale transaction rather than continuous usage of the asset. Hence, an asset should be classified as held for sale rather than the business’s normal assets.
Where are assets held for sale presented in the balance sheet?
The assets held for sale are presented in the section of current assets. These assets are presented as a line item at the end of the current asset section.
Is there any difference between inventory and assets held for sale?
Although inventory and assets held for sale are classified as current assets, there is a difference. The inventory is sold in the normal course of the business, while the sale of the asset held for sale is one of the rare events or even one-off.
What’s the treatment of depreciation for assets held for sale?
The assets held for sale are classified as current assets and no depreciation is charged. However, the business needs to carry out an impairment review at the end of an accounting period.
What’s the objective of classifying assets as held for sale?
The objective of the assets held for sale is to separately present the asset to be sold from assets being used by the company in the business. It helps the users of the financial statement assess the business’s performance and their intention to sell the assets/discontinued operations. In addition to this, the assets classified as held for sale do not need to depreciate.
Conclusion
The business needs to classify non-current assets/discontinued operations in the current asset section when certain criteria are filled. The criteria are based on the commitment of the business to sell the assets, active program to locate the buyer, and selling the asset in the current position.
Once an asset is classified as held for sale, the business does not need to charge depreciation. However, the business needs to assess impairment if the fair value has declined. On initial recognition of the asset held for sale, the assets are lower of the carrying value, and the fair value less cost to sale. The carrying value is the value after deducting accumulated depreciation and impairment from the cost of the asset.
