IFRS 5

Definition

IFRS 5 is an International Financial Reporting Standard that provides guidance on the accounting for non-current assets held for sale and discontinued operations. It establishes how entities should classify, measure, and disclose information about these assets, ensuring that investors and stakeholders receive relevant and reliable information about the financial impact of such operations.

5 Must Know Facts For Your Next Test

1. Under IFRS 5, non-current assets must be measured at the lower of their carrying amount or fair value less costs to sell once classified as held for sale.
2. Discontinued operations must be presented separately in the income statement, highlighting their impact on overall profitability.
3. IFRS 5 requires that assets classified as held for sale should not be depreciated or amortized.
4. The standard mandates that entities provide detailed disclosures about discontinued operations, including a description of the facts and circumstances leading to the disposal.
5. Entities are required to assess whether the criteria for classification as held for sale are met at each reporting date, ensuring timely recognition of any changes.

Review Questions

• How does IFRS 5 impact the reporting of discontinued operations in a company's financial statements?
  • IFRS 5 significantly affects how discontinued operations are reported by requiring these components to be presented separately in the income statement. This separation enhances clarity for investors and stakeholders regarding the performance of ongoing operations versus those that are being phased out. Additionally, it mandates that detailed disclosures accompany these operations, providing essential context about their financial implications.
• Discuss the measurement criteria for non-current assets classified as held for sale under IFRS 5 and its implications on financial reporting.
  • Under IFRS 5, non-current assets classified as held for sale must be measured at the lower of their carrying amount or fair value less costs to sell. This ensures that the reported values accurately reflect what is expected to be realized from these assets. The implications on financial reporting include a potential decrease in asset values if they are deemed impaired, which can significantly impact overall financial position and profitability reported to stakeholders.
• Evaluate how IFRS 5 influences decision-making for companies considering divesting parts of their business, focusing on financial transparency and investor relations.
  • IFRS 5 influences decision-making by providing a structured framework for companies considering divestitures. By requiring clear classification and separate presentation of discontinued operations, it enhances financial transparency, allowing investors to better understand the ongoing viability of the company’s core activities. This transparency builds trust and can influence investment decisions; if divestitures are well communicated, they may alleviate concerns about future earnings potential or operational focus.

Related terms

Discontinued Operations: Components of an entity that have been disposed of or are classified as held for sale, which represent a strategic shift in operations.

Held for Sale: An accounting classification for assets that are expected to be sold rather than used in operations, requiring specific measurement and disclosure criteria.

Impairment Loss: A reduction in the carrying amount of an asset when its recoverable amount is less than its carrying value, which can impact assets classified under IFRS 5.