Disposal Group
A disposal group, under IFRS 5, represents a group of assets to be disposed of, by sale or otherwise, together with any directly associated liabilities. It is classified as held for sale or held for distribution to owners if specific criteria are met, impacting its measurement and presentation in financial statements.
Key Takeaways
- A disposal group is a collection of assets and directly associated liabilities intended for disposition, classified under IFRS 5.
- Classification as 'held for sale' or 'held for distribution' requires specific criteria to be met, including active marketing and high probability of completion within one year.
- Assets within a disposal group are measured at the lower of their carrying amount and fair value less costs to sell, and are no longer depreciated.
- Disposal groups are presented separately on the balance sheet, and their results are often reported as discontinued operations in the income statement.
What is a Disposal Group?
In advanced real estate accounting, a disposal group refers to a group of assets, potentially including an entire operating segment, that an entity intends to dispose of together in a single transaction, along with any liabilities directly associated with those assets. This classification is governed primarily by IFRS 5, 'Non-current Assets Held for Sale and Discontinued Operations,' which dictates specific conditions for an asset or group of assets to be reclassified from its normal operating status.
For real estate investors, understanding disposal groups is crucial when evaluating entities that are actively divesting properties or portfolios. It impacts how these assets are valued on the balance sheet and how their performance is reported on the income statement, offering a clearer picture of an entity's continuing operations versus its strategic exits.
Criteria for Classification
For a disposal group to be classified as 'held for sale' or 'held for distribution to owners,' stringent criteria must be met, indicating a clear commitment to sell and a high probability of completion. These conditions ensure that only genuinely intended disposals are treated under this special accounting framework, preventing speculative reclassifications.
Key Criteria for 'Held for Sale'
- Management Commitment: There must be a firm commitment from management to sell the asset or disposal group.
- Active Marketing: The asset or disposal group must be actively marketed for sale at a reasonable price in relation to its current fair value.
- Immediate Availability: The asset or disposal group must be available for immediate sale in its present condition.
- High Probability of Sale: The sale must be considered highly probable, meaning it is expected to be completed within one year from the date of classification.
- Unlikely Withdrawal: Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn.
Measurement and Presentation
Once a disposal group is classified as held for sale, its accounting treatment changes significantly, impacting both the balance sheet and the income statement. This distinct treatment provides transparency to financial statement users regarding assets that are no longer part of the entity's core, continuing operations.
Initial Measurement
Upon initial classification, a disposal group is measured at the lower of its carrying amount (book value) and its fair value less costs to sell. If the fair value less costs to sell is lower than the carrying amount, an impairment loss is recognized immediately in profit or loss.
Subsequent Measurement
After initial recognition, the assets within the disposal group are no longer depreciated or amortized. They continue to be measured at the lower of their carrying amount and fair value less costs to sell, with any subsequent changes in fair value less costs to sell recognized as impairment losses or reversals of impairment losses.
Presentation in Financial Statements
In the balance sheet, assets of a disposal group are presented separately from other assets, and liabilities are presented separately from other liabilities. In the income statement, the results of a disposal group are often presented as a single line item under 'discontinued operations,' net of tax, after profit or loss from continuing operations.
Real-World Example: REIT Divestment
Consider 'Prime Properties REIT,' a publicly traded real estate investment trust. In Q4 2023, Prime Properties REIT decides to divest its entire portfolio of five suburban office buildings due to a strategic shift towards industrial logistics properties. The carrying amount of this portfolio (assets less directly associated liabilities) is $120 million. After extensive market analysis, the REIT's management determines the fair value less costs to sell to be $115 million.
- Management commits to the sale, actively markets the portfolio, and expects to close within 9 months.
- The portfolio meets all IFRS 5 criteria for classification as a disposal group held for sale.
- Initial Measurement: The disposal group is measured at $115 million (lower of $120 million carrying amount and $115 million fair value less costs to sell).
- Impairment Loss: Prime Properties REIT recognizes an impairment loss of $5 million ($120 million - $115 million) in its Q4 2023 income statement.
- Financial Statement Impact: On the balance sheet, the $115 million disposal group is presented separately. In the income statement, the operating results of these five office buildings for Q4 2023 are reported as discontinued operations.
Frequently Asked Questions
What is the primary accounting standard governing disposal groups?
The primary accounting standard governing disposal groups is IFRS 5, 'Non-current Assets Held for Sale and Discontinued Operations.' This standard provides the specific criteria for classifying assets or groups of assets as held for sale or held for distribution, and dictates their subsequent measurement and presentation in financial statements. US GAAP has similar provisions under ASC 360-10-45.
How does classifying an asset as 'held for sale' impact its depreciation?
Once an asset or disposal group is classified as 'held for sale,' it is no longer depreciated or amortized. The rationale is that the asset's value is now primarily determined by its expected sale price rather than its ongoing use. Instead, it is subject to impairment testing, where its carrying amount is compared to its fair value less costs to sell.
What is the difference between 'held for sale' and 'held for distribution to owners'?
The core difference lies in the intended recipient of the assets. 'Held for sale' implies the assets will be sold to an external party. 'Held for distribution to owners' means the assets will be distributed as a dividend or other form of non-reciprocal transfer to the entity's shareholders or owners. Both classifications require similar criteria regarding commitment and probability of completion.
Why is the 'fair value less costs to sell' important for disposal groups?
Fair value less costs to sell is crucial because it represents the net proceeds an entity expects to receive from the sale of the disposal group. This metric is used to determine if an impairment loss needs to be recognized upon classification and for subsequent measurement. It ensures that the assets are not carried at a value higher than their recoverable amount from the planned disposition.