11.2 Held-for-sale classification
8 min read•august 19, 2024
Held-for-sale classification is a crucial aspect of accounting for long-lived assets in mergers and acquisitions. It impacts how companies measure, present, and disclose assets they plan to sell within a year, affecting financial statements and stakeholder perceptions.
Understanding the criteria, measurement, and presentation of held-for-sale assets is essential for accurately reflecting a company's financial position. This knowledge is vital for navigating complex financial structures and ensuring compliance with accounting standards in M&A transactions.
Criteria for held-for-sale classification
- Assets must meet specific criteria to be classified as held-for-sale under which provides guidance on accounting for long-lived assets
- Held-for-sale classification impacts the measurement, presentation, and disclosure of the asset in the financial statements
- Proper classification is important for accurately reflecting the financial position and performance of the company, especially in the context of mergers, acquisitions, and complex financial structures
Management's commitment to selling plan
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- There must be a firm commitment by management to sell the asset as evidenced by an approved plan
- The plan should outline the specific actions to be taken to complete the sale (marketing efforts, identifying potential buyers)
- Management's commitment demonstrates a high probability of the sale occurring within the required timeframe
- Example: Board of directors approves a resolution to sell a manufacturing facility and allocates resources to actively market the property
Asset available for immediate sale
- The asset must be available for immediate sale in its present condition
- Any repairs or modifications necessary to sell the asset should be minor and not delay the sale process
- The asset should not be in use or generating revenues for the company at the time of classification
- Example: A piece of equipment is taken out of production and prepared for sale by cleaning and performing routine maintenance
Actively marketed at reasonable price
- The company must initiate an active program to locate a buyer and complete the sale
- The asking price should be reasonable in relation to the asset's current
- Marketing efforts may include listing the asset with brokers, advertising, or contacting potential buyers directly
- Example: A company hires a real estate agent to list a warehouse for sale at a price based on recent comparable sales in the area
Sale expected within one year
- There should be a high probability that the sale will be completed within one year from the date of classification
- This timeframe may be extended in limited circumstances beyond the company's control (regulatory delays, market conditions)
- The one-year requirement ensures that held-for-sale assets are distinguished from those held for long-term use
- Example: A company classifies a division as held-for-sale and receives a letter of intent from a buyer indicating a closing date within 10 months
Measurement of held-for-sale assets
- Once an asset meets the criteria for held-for-sale classification, it is measured differently than assets held for continued use
- The measurement of held-for-sale assets impacts the reported on the balance sheet and any gains or losses recognized in the income statement
- Proper measurement is crucial for providing accurate financial information to stakeholders, particularly in complex financial transactions
Lower of carrying amount vs fair value
- Held-for-sale assets are measured at the lower of their carrying amount or fair value less costs to sell
- Carrying amount is the asset's book value, which is the original cost less accumulated depreciation or amortization
- Fair value is the price that would be received to sell the asset in an orderly transaction between market participants
- If fair value less costs to sell is lower than the carrying amount, the asset is written down to this lower amount
Costs to sell
- Costs to sell are the incremental direct costs to transact the sale (commissions, legal fees, title transfer costs)
- These costs are deducted from the fair value when determining the measurement of the held-for-sale asset
- Costs to sell do not include expenses related to ongoing maintenance or operation of the asset prior to sale
- Example: A company classifies a building as held-for-sale and estimates $50,000 in broker commissions and legal fees to complete the sale
Depreciation ceased upon classification
- Depreciation or amortization of a held-for-sale asset ceases upon classification
- This reflects the expectation that the economic benefits of the asset will be realized through sale rather than continued use
- Stopping depreciation prevents overstatement of expenses and understatement of the asset's carrying amount
- Example: A company classifies a machine as held-for-sale on March 1 and stops recording monthly depreciation expense of $1,000
Presentation in financial statements
- Held-for-sale assets are presented differently in the financial statements than assets held for continued use
- Proper presentation provides clarity to financial statement users about the nature and impact of held-for-sale assets
- Presentation requirements apply to the balance sheet, income statement, and statement of cash flows
Separate line items on balance sheet
- Held-for-sale assets are presented as separate line items in the asset section of the balance sheet
- They are typically listed after the current assets and before the non-current assets held for use
- Separate presentation draws attention to the assets' unique status and expected near-term disposition
- Example: "Assets held for sale" is reported on the balance sheet with a carrying amount of $2 million
Gains/losses in income from continuing operations
- Gains or losses resulting from the initial measurement or subsequent remeasurement of held-for-sale assets are included in income from continuing operations
- These gains or losses are not reported as unless the held-for-sale asset qualifies as such
- Presenting gains or losses in continuing operations reflects their nature as operational items rather than strategic shifts
- Example: A company recognizes a $100,000 loss upon classifying equipment as held-for-sale due to a decline in fair value
Cash flows from operating vs investing activities
- Cash inflows and outflows related to held-for-sale assets are classified based on the nature of the underlying cash flows
- Cash flows from operating activities include receipts or payments related to the asset's operations prior to sale
- Cash flows from investing activities include receipts from the sale of the asset and payments for costs to sell
- Example: Proceeds of $500,000 from the sale of a held-for-sale building are reported as an investing cash inflow
Subsequent changes to held-for-sale plan
- Companies may experience changes to their original held-for-sale plan due to various factors (market conditions, strategic shifts)
- Accounting for subsequent changes ensures that the financial statements accurately reflect the current status and intended use of the assets
- Subsequent changes may result in reclassification, measurement adjustments, and catch-up depreciation
Reclassification when no longer held-for-sale
- If an asset no longer meets the , it is reclassified as held for use
- Reclassification may occur if the company decides to retain the asset, experiences significant delays in the sale process, or fails to receive acceptable offers
- Upon reclassification, the asset is measured at the lower of its carrying amount before held-for-sale classification (adjusted for missed depreciation) or its fair value at the date of reclassification
- Example: A company reclassifies a division as held for use after failing to receive any bids within the one-year timeframe
Adjustment to carrying amount
- When an asset is reclassified from held-for-sale to held for use, its carrying amount is adjusted for any depreciation expense that would have been recognized during the held-for-sale period
- This adjustment ensures that the asset's carrying amount reflects its current economic value and aligns with the accounting for similar assets held for use
- The adjustment is recorded as a change in accounting estimate in the period of reclassification
- Example: Upon reclassification, a company increases the carrying amount of a building by $200,000 to reflect the depreciation that would have been recorded during the held-for-sale period
Catch-up depreciation recognized
- Catch-up depreciation is the cumulative depreciation expense that would have been recognized during the held-for-sale period
- It is recorded as a single adjustment in the period of reclassification rather than restating prior periods
- Catch-up depreciation aligns the asset's carrying amount with its remaining useful life and ensures comparability with other assets held for use
- Example: A company records $50,000 of catch-up depreciation upon reclassifying equipment as held for use, representing the depreciation expense missed during the held-for-sale period
Disclosures for held-for-sale assets
- Companies are required to provide certain disclosures related to held-for-sale assets in their financial statements
- These disclosures provide stakeholders with relevant information about the nature, timing, and financial impact of held-for-sale transactions
- Disclosures may be provided in the notes to the financial statements or other sections as appropriate
Description of facts and circumstances
- Companies should disclose a description of the facts and circumstances leading to the held-for-sale classification
- This may include the reasons for selling the asset, the approval process, and any significant events or transactions related to the decision
- The description provides context for understanding the held-for-sale classification and its impact on the company's operations and financial position
- Example: A company discloses that it classified a subsidiary as held-for-sale due to a strategic shift towards core operations and received board approval on a specific date
Expected manner and timing of disposal
- Companies should disclose the expected manner and timing of disposing of the held-for-sale asset
- The manner of disposal may include a sale to a third party, spin-off, or management buyout
- The timing of disposal should indicate the expected completion date or range of dates
- These disclosures help stakeholders assess the likelihood and timeframe of the asset's sale and its potential impact on the company's cash flows and operations
- Example: A company discloses that it expects to sell a held-for-sale manufacturing plant to a strategic buyer within the next 6-9 months
Gain/loss recognized in income statement
- Companies should disclose any gain or loss recognized in the income statement related to the initial measurement or subsequent remeasurement of the held-for-sale asset
- This disclosure should include the amount of the gain or loss and the line item in which it is reported
- Disclosing gains or losses provides transparency about the financial impact of the held-for-sale classification and helps users assess the company's performance
- Example: A company discloses a $500,000 loss recognized in operating expenses due to writing down a held-for-sale intangible asset to its fair value less costs to sell
Segment where asset is reported
- If the held-for-sale asset is part of a reportable segment, the company should disclose the segment in which it is reported
- This disclosure helps users understand the relationship between the held-for-sale asset and the company's broader operations and segment structure
- Segment information may be relevant for assessing the strategic rationale and financial impact of the held-for-sale classification
- Example: A company discloses that a held-for-sale business unit is reported within its "Consumer Products" segment, which aligns with the company's organizational structure and internal reporting
Key Terms to Review (17)
ASC 360: ASC 360 refers to the Accounting Standards Codification Topic 360, which deals with property, plant, and equipment (PP&E) and the criteria for their classification, recognition, and measurement. This standard outlines how to evaluate whether long-lived assets should be classified as held-for-sale and establishes the accounting treatment for assets that meet these criteria, impacting financial reporting and decision-making.
Business combinations: Business combinations refer to the merging of two or more companies into a single entity, aimed at achieving synergies, enhancing market share, and increasing operational efficiencies. This process includes different forms of mergers and acquisitions, which often result in changes to financial reporting and accounting practices. Understanding how business combinations affect financial statements is crucial for assessing the overall impact on the organizations involved.
Carrying amount: Carrying amount refers to the value at which an asset is recognized on the balance sheet, after deducting any accumulated depreciation, amortization, or impairment costs. This figure is crucial because it represents the net book value of an asset and is used in evaluating potential impairment of investments or determining the classification of assets that are held for sale.
Discontinued operations: Discontinued operations refer to a component of a business that has been disposed of or is classified as held for sale and represents a strategic shift in a company's operations. These operations are distinct from ongoing business activities, as they can significantly impact financial statements and help users understand the continuing profitability of the company. Reporting discontinued operations separately provides clarity regarding the financial performance of ongoing segments and allows investors to make more informed decisions.
Divestitures: Divestitures refer to the process of selling off a subsidiary, business unit, or asset by a company. This can occur for various strategic reasons, such as focusing on core operations, improving financial health, or complying with regulatory requirements. The classification of assets as held-for-sale is particularly relevant when a company intends to divest, as it reflects the company's commitment to sell and may have implications on financial reporting and asset valuation.
Fair Value: Fair value is the estimated price at which an asset could be bought or sold in a current transaction between willing parties, reflecting both the market conditions and the specific attributes of the asset. It is crucial for various financial reporting requirements and helps ensure that financial statements provide a true representation of a company's financial position.
FASB: The Financial Accounting Standards Board (FASB) is a private-sector organization responsible for establishing and improving financial accounting and reporting standards in the United States. Its guidelines shape how companies prepare their financial statements, impacting various areas such as the treatment of pushdown accounting, the assessment of goodwill impairment, and the reporting of intercompany transactions. FASB standards also play a crucial role in determining the primary beneficiary in consolidation scenarios and defining classifications for held-for-sale assets, as well as segment disclosures within financial statements.
Financial statement presentation: Financial statement presentation refers to the way financial information is organized, structured, and displayed in financial statements to ensure clarity and comparability for users. It includes the layout, categorization, and disclosures necessary to provide an accurate depiction of a company's financial position, performance, and cash flows. Proper presentation is essential for users to make informed decisions based on the financial statements.
Held-for-sale criteria: Held-for-sale criteria refer to the specific conditions under which a long-lived asset or disposal group can be classified as held-for-sale in accordance with accounting standards. This classification requires that the asset is available for immediate sale, its sale is highly probable, and it is being actively marketed at a reasonable price. Meeting these criteria impacts the asset's valuation and financial reporting, particularly in relation to impairment testing and subsequent measurement.
IASB: The International Accounting Standards Board (IASB) is an independent body that develops and establishes International Financial Reporting Standards (IFRS), which aim to bring transparency, accountability, and efficiency to financial markets around the world. It plays a crucial role in shaping the accounting principles that govern financial reporting, which directly impacts pushdown accounting, goodwill impairment testing, intercompany transactions, primary beneficiary determination, held-for-sale classification, and segment disclosures.
Impairment Loss: Impairment loss refers to the reduction in the carrying amount of an asset when its recoverable amount falls below its book value. This concept is particularly important in assessing goodwill, indefinite-lived intangible assets, and equity method investments, as it ensures that these assets are not overstated on the financial statements.
Initial recognition: Initial recognition refers to the process of recording an asset or liability in the financial statements at its fair value upon acquisition or at the point it meets the criteria for recognition. This concept is crucial as it establishes the basis for how entities report their financial position and performance, especially in situations involving contingent consideration and assets classified as held-for-sale. Accurate initial recognition ensures that the financial statements reflect the true economic reality of the transactions and events affecting an organization.
Measurement basis: Measurement basis refers to the method used to determine the monetary value of an asset or liability on financial statements. It includes various approaches, such as historical cost, fair value, or net realizable value, which affect how financial information is reported and understood. Understanding measurement basis is essential for accurately classifying and assessing the impact of certain transactions and changes in the business environment.
Notes to financial statements: Notes to financial statements provide additional information and context about the numbers presented in the main financial statements, helping users understand the company's financial position and performance. These notes typically explain accounting policies, detail specific line items, and disclose any contingent liabilities or commitments, ensuring compliance with accounting standards.
Private equity firms: Private equity firms are investment management companies that provide capital to private companies or acquire public companies to delist them from stock exchanges. These firms raise funds from institutional investors and accredited individuals to invest in various businesses, often aiming to improve operational efficiency and increase the value of their investments before selling them for a profit.
Public companies: Public companies are corporations whose shares are publicly traded on stock exchanges, making their financial information available to the general public. These companies are typically larger and more established, and they raise capital by selling shares to investors, which allows them to fund operations and growth. The accountability and transparency required of public companies can significantly impact their financial reporting and compliance requirements.
Subsequent Measurement: Subsequent measurement refers to the process of valuing assets and liabilities after their initial recognition in financial statements. This concept is important because it dictates how changes in value, such as impairment or revaluation, are reflected in financial reporting. Understanding subsequent measurement helps ensure that financial statements provide an accurate representation of a company’s financial position over time, particularly in the context of contingent considerations and assets classified as held-for-sale.