Ind AS 105

Ind AS 105: Non-Current Assets Held for Sale and Discontinued Operations

Ind AS 105: At a Glance

Ind AS 105 is an Indian Accounting Standard that prescribes the accounting treatment for non-current assets (or disposal groups) that are classified as “held for sale” and for the presentation and disclosure of “discontinued operations.” Its primary objective is to enhance comparability and transparency by ensuring that assets intended for sale are presented differently from assets used in ongoing operations, and that the financial performance of operations that have been discontinued or are being disposed of is separately disclosed.

The standard mandates specific criteria for classifying an asset or disposal group as held for sale, dictates its subsequent measurement at the lower of its carrying amount and fair value less costs to sell, and prohibits depreciation or amortisation. Furthermore, it requires the results of discontinued operations to be presented as a single amount on the face of the statement of profit and loss, net of tax.

The Genesis of Ind AS 105: Tracing its Roots

Ind AS 105 forms a crucial part of India’s convergence journey with International Financial Reporting Standards (IFRS). It is directly modelled after and is substantively identical to IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, issued by the International Accounting Standards Board (IASB). The Ministry of Corporate Affairs (MCA) in India notified the Ind AS framework to align Indian accounting practices with global standards, aiming to provide a common, high-quality, and understandable set of financial reporting standards. The need for a specific standard like Ind AS 105 arose to address the unique reporting challenges when an entity commits to a plan to sell a significant portion of its assets or operations, ensuring that such strategic decisions are transparently reflected in its financial statements without distorting the performance of its continuing core activities.

Navigating Ind AS 105: Understanding its Core Mandates

Ind AS 105 provides detailed guidance on several key aspects:

• Classification Criteria for Assets Held for Sale:

  An entity must classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. This classification is not arbitrary; it requires meeting stringent conditions:

  • The asset (or disposal group) must be available for immediate sale in its present condition.
  • The sale must be “highly probable.” This means:
    • Management is committed to a plan to sell.
    • An active program to locate a buyer and complete the plan has been initiated.
    • The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
    • The sale is expected to qualify for recognition as a completed sale within one year from the date of classification.
    • Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

• Measurement Principles:

  Once classified as held for sale, a non-current asset (or disposal group) is measured at the lower of its carrying amount and fair value less costs to sell. Importantly, the asset is no longer depreciated or amortised while it is classified as held for sale, as its economic benefits are expected to be realised through sale rather than usage. Impairment losses are recognised for any initial write-down to fair value less costs to sell. Subsequent increases in fair value less costs to sell are recognised to the extent of any cumulative impairment loss previously recognised under Ind AS 105 or Ind AS 36 (Impairment of Assets).

• Presentation in Financial Statements:

  Ind AS 105 mandates distinct presentation for assets held for sale and discontinued operations:

  • Statement of Financial Position (Balance Sheet): Assets classified as held for sale are presented separately from other assets, typically under a heading like “Assets held for sale.” Similarly, liabilities directly associated with those assets (forming a disposal group) are presented separately as “Liabilities associated with assets held for sale.”
  • Statement of Profit and Loss: The results of discontinued operations are presented as a single amount, comprising the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group constituting the discontinued operation. This separate presentation allows users to differentiate between the ongoing performance of continuing operations and the impact of discontinued activities.

• Extensive Disclosure Requirements:

  To ensure transparency, Ind AS 105 requires significant disclosures in the notes to the financial statements, including a description of the non-current asset or disposal group, the facts and circumstances of the sale, the expected manner and timing of disposal, and a detailed analysis of the single amount presented for discontinued operations.

The Strategic Significance of Ind AS 105 for Enterprises

Understanding Ind AS 105 is crucial for businesses for several compelling reasons:

• Accurate Financial Reporting: It prevents the distortion of a company’s financial performance by isolating the results of operations that are no longer part of its core, ongoing activities. This provides a clearer picture of the sustainable earnings and asset base.
• Informed Investment Decisions: Investors and analysts rely on this standard to evaluate a company’s continuing operations, aiding in more accurate valuation and investment decision-making. The separate presentation of discontinued operations helps in forecasting future earnings and cash flows from ongoing businesses.
• Enhanced Transparency: By requiring detailed disclosures, Ind AS 105 ensures stakeholders are aware of management’s strategic decisions to divest significant assets or business units, along with the financial impact of such decisions.
• Compliance and Auditability: Adherence to Ind AS 105 is mandatory for companies falling under the Ind AS framework. Non-compliance can lead to qualified audit opinions and regulatory penalties.
• Strategic Planning and Valuation: Internally, the classification process under Ind AS 105 helps management formalise and execute disposal plans, and it impacts how the entity’s assets and strategic direction are perceived by the market.

Applying Ind AS 105: Real-World Business Examples

Ind AS 105 comes into play in various business scenarios:

• Corporate Divestitures: A conglomerate decides to sell one of its non-core business units (e.g., a hotel chain divesting its laundry services division). The assets and operations of the laundry division would be classified under Ind AS 105.
• Asset Sales as part of Restructuring: A manufacturing company plans to sell an old, inefficient factory building and its related machinery as part of a modernisation program. These assets would be classified as held for sale.
• Discontinuation of Product Lines or Segments: A technology company decides to exit a particular software product line that is no longer profitable. The assets specifically dedicated to that product line and its historical financial results would fall under discontinued operations.
• Mergers & Acquisitions (M&A): When a company acquires another entity, and immediately after acquisition, identifies certain parts of the acquired business or assets for quick resale, those assets may be classified as held for sale.
• Real Estate Development: A property developer may classify certain completed properties as held for sale if they are actively marketed for sale rather than intended for long-term rental income.

Exploring Connections: Key Concepts Linked to Ind AS 105

Several other accounting standards and concepts interact closely with Ind AS 105:

• IFRS 5: The international counterpart, serving as the blueprint for Ind AS 105.
• Ind AS 36 (Impairment of Assets): An asset must be tested for impairment under Ind AS 36 before its initial classification as held for sale. Any impairment loss is recognised then.
• Ind AS 16 (Property, Plant and Equipment) / Ind AS 38 (Intangible Assets): These standards govern the accounting for non-current assets prior to their classification as held for sale.
• Discontinued Operations: A core concept within Ind AS 105, referring to a component of an entity that either has been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.
• Disposal Group: 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.
• Fair Value Less Costs to Sell: The key measurement basis for assets held for sale, defined as the amount obtainable from the sale of an asset or disposal group in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.

Staying Up-to-Date: Latest Insights on Ind AS 105

While Ind AS 105 (and its IFRS counterpart, IFRS 5) has been a relatively stable standard without major recent amendments, its application continues to evolve with economic realities:

• Scrutiny of “Highly Probable” Criteria: Auditors and regulators are increasingly scrutinising management’s judgment regarding the “highly probable” criterion, especially in volatile economic climates or uncertain market conditions. The commitment to a plan of sale must be robust and demonstrable.
• Valuation Challenges: Estimating “fair value less costs to sell” can be challenging during periods of market illiquidity or rapid economic change, requiring careful judgment and robust valuation methodologies.
• Impact of Global Events: Events like pandemics (e.g., COVID-19) or geopolitical shifts can significantly impact the probability of sale, necessitating re-evaluation of classification and measurement.
• Emphasis on Disclosure Quality: There’s an ongoing focus on ensuring that disclosures are comprehensive, clear, and provide sufficient information for users to understand the nature, financial effects, and expected timing of disposals and discontinued operations.

Cross-Functional Relevance: Departments Engaged with Ind AS 105

Ind AS 105 is not solely an accounting standard; its implications touch various departments within an organisation:

• Finance & Accounting: Directly responsible for the identification, classification, measurement, presentation, and disclosure of assets held for sale and discontinued operations in the financial statements.
• Mergers & Acquisitions (M&A) / Corporate Development: Involved in the strategic decisions to divest business units or assets, making the understanding of Ind AS 105 crucial for deal structuring and post-deal accounting.
• Strategy & Business Planning: Management and the board define strategic objectives that may lead to divestitures, requiring an understanding of how these decisions will be reflected in financial reports.
• Legal Department: Involved in drafting and reviewing sale agreements, ensuring that the terms align with the “highly probable” criteria and other legal aspects of the disposal.
• Investor Relations: Responsible for communicating the financial impact of disposals and discontinued operations to investors, analysts, and other stakeholders.
• Internal Audit: Reviews the processes and controls related to Ind AS 105 compliance.

The Road Ahead: Future Implications and Outlook for Ind AS 105

The future trajectory for Ind AS 105, while likely stable in its core principles, will be influenced by broader trends in financial reporting:

• Digital Reporting and XBRL: As financial reporting increasingly moves towards digital formats (e.g., XBRL tagging), the granularity and comparability of disclosures related to assets held for sale and discontinued operations will improve, potentially leading to more sophisticated analysis.
• Increased Scrutiny on Intent and Probability: Regulators and auditors may continue to heighten their focus on management’s intent and the robustness of the “highly probable” assessment, particularly for large or complex disposal transactions.
• Sustainability and ESG Factors: While not directly part of Ind AS 105, strategic decisions to divest certain assets or operations (e.g., those with high carbon footprint or controversial business practices) may be driven by ESG considerations, indirectly bringing the standard into discussions around sustainable business practices.
• Further Global Harmonisation: Ongoing efforts by the IASB and national standard-setters aim to reduce divergences in accounting standards globally, ensuring that Ind AS 105 remains closely aligned with IFRS 5.
• Data Analytics in Audit: Advanced data analytics tools may be increasingly used by auditors to identify potential assets for sale or to verify the reasonableness of management’s assessments regarding sale probability and fair value.