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ESMA is concerned that the absence of certain definitions in IFRS 5, together with the lack of implementation guidance gives a lot of flexibility to entities when classifying and measuring non-current assets held for sale and discontinued operations, and this may impair the comparability and understandability of financial statements.
In this paper, ESMA has provided some examples to illustrate the concerns mentioned above. They are grouped based on the nature of the matters raised:
a. Scope
b. Classification as “held for sale”
c. Changes to a plan of sale
d. Definition of a major line of business
e. Unit of account
f. Impairment.
ESMA and European enforcers have identified divergence in the application of IFRS 5 in relation to both the nature of the transaction which triggered a loss of control and the types of assets included in a disposal group.
a.1) Loss of control over non-current assets or disposal groups
Paragraph 6 of IFRS 5 states that “an entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transactionrather than through continuing use.” [emphasis added]. Paragraph 5A of IFRS 5 indicates that IFRS 5 also applies to a non-current asset (or disposal group) that is classified as held for distribution to owners acting in their capacity as owners.
Enforcers have identified the following examples of IFRS 5 being applied to other transactions than formally sales that result in substance in a loss of control: dilution, exercise of call options or modification of a shareholders’ agreement.
Case 1 – Dilution
Case 2 – Call option given to a non-controlling shareholder
Case 3 – Modification of the shareholders’ agreement
a.2) Disposal groups consisting mainly of financial instruments
Another issue related to the scope of IFRS 5 has been identified for financial institutions for which disposal groups mainly, or fully, consist of financial instruments sold at loss IFRS 5 excludes from its measurement basis financial assets within the scope of IAS 39 – Financial instruments: Recognition and measurement.
Appendix A of IFRS 5 defines a disposal group as “a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction”. Paragraph 4 of IFRS 5 states that “[…] the group may include any assets and any liabilities of the entity, including current assets, current liabilities and assets excluded by paragraph 5 from the measurement requirements of this IFRS. If a non-current asset within the scope of the measurement requirements of this IFRS is part of a disposal group, the measurement requirements of this IFRS apply to the group as a whole, so that the group is measured at the lower of its carrying amount and fair value less costs to sell.”
While paragraph 4 of IFRS 5 requires the disposal group to be measured according to its provisions, paragraph 5 of IFRS 5 states that financial assets are scoped out for measurement purposes. There-fore, it is not clear whether IFRS 5 applies to disposal groups that consist mainly of financial assets, which is particularly relevant if it is expected that the disposal groups will be sold at loss. In such situations, applying the requirement in paragraph 5 of IFRS 5 would imply that the loss is recognised only when the sale effectively occurs. This conflicts with the measurement principles set out in IFRS 5 for disposal groups that require measurement at fair value less cost to sell at the date of classification as a “disposal group”.