Ind AS 105: Accounting Treatment for Assets Held for Sale
When a company decides to sell a plant, subsidiary, or an entire business line, a practical accounting question comes up: should the asset continue to be depreciated as if the company still plans to use it? Under Ind AS 105, the answer is no.
Once an asset genuinely meets the criteria to be classified as “held for sale,” its accounting treatment changes. Depreciation and amortisation stop, the asset is measured on a different basis, and it is presented separately from the company’s other assets.
What Does Ind AS 105 Cover?
Ind AS 105 mainly deals with two things.
First, it explains how to account for non-current assets, or groups of assets and related liabilities known as disposal groups, when the company plans to recover their value primarily through a sale rather than continued use.
Second, it sets out how discontinued operations should be presented. This helps ensure that a business the company is exiting does not get mixed together with the results of its continuing operations.
When Can an Asset Be Classified as Held for Sale?
The classification test under Ind AS 105 is fairly strict.
An asset or disposal group can be classified as held for sale when its carrying amount is expected to be recovered mainly through a sale rather than through continued use. It must be available for immediate sale in its current condition, and the sale must be highly probable.
Generally, this means the company should expect the sale to be completed within one year of classification, although exceptions can apply when the delay is caused by circumstances genuinely outside the company’s control.
Simply having an intention to sell an asset is not enough. There needs to be a genuine plan to sell, active efforts to find a buyer, and the asset should generally be marketed at a price that is reasonable in relation to its current fair value.
An asset that the company plans to abandon or scrap also does not qualify as “held for sale,” because abandonment is not the same as selling the asset.
How Is the Asset Measured After Classification?
This is one of the most important requirements of Ind AS 105.
Once an asset or disposal group is classified as held for sale, it is measured at the lower of its carrying amount and fair value less costs to sell.If the fair value less costs to sell is lower than the carrying amount, the difference is recognised as an impairment loss.If the value subsequently increases while the asset remains classified as held for sale, a gain may be recognised. However, that gain is limited to the amount of impairment losses previously recognised under Ind AS 105 or related standards.
Another major change is that depreciation and amortisation stop from the date the asset is classified as held for sale. The reasoning is straightforward: the company is no longer accounting for the asset on the assumption that it will continue to generate economic benefits through normal use.
Keep Held-for-Sale Assets Separate
Ind AS 105 also changes how these assets appear in the financial statements.
Assets classified as held for sale are presented separately from other assets on the balance sheet. Similarly, liabilities that form part of a disposal group are presented separately from the company’s other liabilities.
This separate presentation makes it easier for users of the financial statements to identify which assets and liabilities are connected with a planned disposal rather than the company’s ongoing operations.Discontinued operations are also presented separately in the statement of profit and loss.
An operation generally qualifies as a discontinued operation when it represents a separate major line of business or geographical area, or when it is a subsidiary acquired exclusively with a view to resale. The relevant results are presented as discontinued from the point at which the operation meets the applicable criteria or is actually disposed of.
Why Does Ind AS 105 Matter in Valuation?
Ind AS 105 has an important connection with valuation because fair value less costs to sell needs proper support. It is not simply a figure management can choose without evidence.This becomes particularly important when a disposal group contains several different assets and liabilities. The valuation needs to be considered appropriately across the assets within the group rather than treating the entire disposal group as an unsupported lump-sum figure.
For example, when a company is preparing to sell a business or carve out a particular group of assets, valuation professionals may need to consider appropriate valuation techniques based on the nature of the assets and the applicable measurement requirements.
Getting the classification date and fair value estimate right can also have a direct impact on reported profits. An impairment loss recognised when an asset is classified as held for sale affects profit or loss, while any subsequent increase in value is subject to the limits prescribed by the standard.These are therefore areas where auditors and other stakeholders will expect the company to have appropriate valuation support and documentation.
Ind AS 105 ensures that assets a company genuinely intends to sell are not accounted for as though management plans to use them indefinitely.Once the held-for-sale criteria are met, the accounting treatment changes: depreciation and amortisation stop, the asset is measured at the lower of its carrying amount and fair value less costs to sell, and the relevant assets, liabilities, and discontinued operations are presented separately.
For companies involved in business disposals, restructurings, or asset sales, understanding these requirements is important not only for financial reporting but also for supporting the valuation figures that flow into the financial statements.
