Accounting for Assets Held for Sale
Held for sale refer to the non-current assets that the business intends to sell rather than for internal use. In other words, confirming 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 of the assets. For instance, once an asset is classified as held for sale in the section of current assets, no depreciation is applied.
The main reason for this accounting policy is to reflect a more realistic view of affairs and prevent possible abuse by management in terms of distorting information through the manipulation of depreciation rates. Another way management could manipulate information would be by selling depreciated assets and then booking a profit on disposal.
Disallowing depreciation when an asset is classified as held for sale is prudent from a financial reporting perspective. It shows asset values more realistically. If a company has many such assets, its overall profitability could be overstated which would give a wrong impression about operating results to users of financial statements like potential investors.
In general, companies should disclose material events that could have an impact on the interpretation of financial statements. This information helps users make informed decisions about investments in a company.
When a company decides to sell an asset, there are certain accounting treatments and disclosures that must be made in order to comply with accounting standards.
The asset must be classified as held for sale on the balance sheet. This classification indicates that the asset is not being used in the company’s operations and is instead being held for the purpose of generating cash through a sale. The asset is then recorded at its fair value, less costs to sell. This treatment is the same whether the company is selling a single asset or a group of assets.
Held for Sale Criteria
The non-current assets will be reclassed to held for sale only when the following criteria are met:
- The company has a strong commitment to selling the assets
The company has a strong commitment to sell its assets. The sales team is working tirelessly to find the right buyer and negotiate the best possible price. The assets are withdrawn from the operation keep in good condition for reselling.
- The assets are available for immediate sale
The assets are available for immediate sale without the need for any further modification. The assets are not in use, so the buyer can implement them immediately. The buyers do not need to wait for any further after the sale is complete. The assets can be delivered on-demand.
- The company is actively looking for the buyers
The company not only excludes the assets from the operation but also actively puts them on sale. The team may be looking for a buyer by registering on the available market. They may be contacting the agency to find the customer. It is different due to the nature of assets.
- The sale is expected to incur within a year
This process is now well underway and is expected to be completed within the next 12 months. The company has already received offers from a number of interested parties and is currently in negotiations with several of these.
- The assets are kept active in the market at a reasonable price compared to the fair value
The company has to put the assets on the market and look for buyers. The selling price of the assets has to be reasonable if compare to the fair value. It prevents the company from setting up higher prices to avoid the sale.
- The company is not expected the change the plan to sell the assets
It is not a temporary decision made by the company or management. The company has decided to stop using the assets and put them for sale. The company may have a plan to purchase the replaced assets for the operations. So it is almost impossible for them to revise the plan.
Accounting for Non-Current Assets Held of Sale
The assets held for sale are valued at a 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.
The fair value less the cost to sell is the estimated selling price of the asset less the costs to complete the sale. The impairment charge is an expense that reflects the write-down of the asset to its estimated selling price. The cost to sale includes commissions, legal fees, and other costs incurred in connection with the sale of the asset.
- Initial Measurement
When the assets meet the requirement as held for sale, the company has to reverse the non-current assets to assets held for sale. The reclass amount depends on the carrying amount which is the cost less accumulated depreciation, impairment, and other charges. The company has to access the impairment of the assets and other applicable charges. It prevents the company from overstating the balance of the asset.
The journal entry is debiting assets held for sale, accumulated depreciation, and cost of fixed assets.
| Account | Debit | Credit |
|---|---|---|
| Assets Held for Sale | $$$ | |
| Fixed Assets – Accumulated Depreciation | $$$ | |
| Fixed Assets – Cost | $$$ |
After the classification, the non-current assets need to measure at a lower of carrying amount and fair value less cost to sale. It means the company has to evaluate the assets immediately after reclassification and they also estimate the cost to complete the sale transaction.
If the fair value less cost to sale is lower than the carrying amount, the company records the impairment expense and reduces the balance of the assets accordingly.
The assets held for sale have to stop depreciation immediately after the reclassification. The company has to exclude it from the operation and be ready to sell to customers.
- Subsequent Measurement
At each reporting date, the assets held for sale need to reevaluate based on the fair value less cost to sale. If the fair value decrease, the company has to recognize additional impairment expense on the income statement.
If the fair value increase, they have to increase the balance of the assets. But it cannot be more than the total prior impairment expense. The increased amount will be recorded in the profit and loss account.
