IFRS 15 Sale of Non financial assets

IFRS 15 Sale of Non financial assets

INTRO IFRS 15 Sale of Non financial assets – Certain aspects of IFRS 15 apply to the sale or transfer of non financial assets (such as intangible assets and property, plant, and equipment) that are not an output of the entity’s ordinary activities. [IAS 16, IAS 38, IAS 40]

When an entity sells or transfers a non financial asset that is not an output of its ordinary activities, it derecognises the asset when control transfers to the recipient, using the guidance on transfer of control in IFRS 15 (see Transfer of control from Step 5 IFRS 15 in the link).

The resulting gain or loss is the difference between the transaction price measured under IFRS 15 (using the guidance IFRS 15 Sale of Non financial assetsin Step 3 of the model) and the asset’s carrying amount. In determining the transaction price (and any subsequent changes to the transaction price), an entity considers the guidance on measuring variable consideration – including the constraint, the existence of a significant financing component, non cash consideration, and consideration payable to a customer (see consideration payable to a customer from Step 5 IFRS 15 in the link).

The resulting gain or loss is not presented as revenue. Likewise, any subsequent adjustments to the gain or loss – e.g. as a result of changes in the measurement of variable consideration – are not presented as revenue.

Judgment required to identify ordinary activities

Under IFRS 15, a ‘customer’ is defined as a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. Because ‘ordinary activities’ is not defined, evaluating whether the asset transferred is an output of the entity’s ordinary activities may require judgment.

In many cases, this judgment will be informed by the classification of a non financial asset – e.g. an entity that purchases a tangible asset may assess on initial recognition whether to classify the asset as property, plant, and equipment or as inventory. Typically, the sale or transfer of an item that is classified as property, plant, and equipment will result in a gain or loss that is presented outside revenue, while the sale or transfer of inventory will result in the IFRS 15 Sale of Non financial assetsrecognition of revenue.

Accounting for a non-current or long-lived non financial asset held for sale may result in a gain or loss on transfer of control because consideration may differ from fair value When the carrying amount of a non-current non financial asset is expected to be recovered principally through a sale (rather than from continuing use), the asset is classified as held for sale if certain criteria are met.

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IFRS 15 does not amend the current measurement and presentation guidance for non-current assets that are held for sale. Under this guidance, assets that are held for sale are measured at the lower of fair value less costs to sell and the carrying amount, which may differ from the expected transaction price as determined under IFRS 15.

If the sale or transfer includes variable consideration that is constrained under IFRS 15, then the resulting transaction price that can be recognized could be less than the fair value. This could result in the recognition of a loss when control of the asset transfers to the counterparty, even though the carrying amount may be recoverable through subsequent adjustments to the transaction price. In these situations, an entity may consider providing an early warning disclosure about the potential consequences of these accounting requirements.

Little difference in accounting for sales of real estate to customers and non customers

Because an entity applies the guidance on measuring the transaction price for both customer and non customer transactions, the difference in accounting for an ordinary (customer) versus a non-ordinary (non customer) sale of real estate is generally limited to the presentation in the statement of comprehensive income (revenue and cost of sales, or gain or loss). [IAS 16, IAS 40]

Sale or transfer of a subsidiary or associate

When calculating the gain or loss on the sale or transfer of a subsidiary or associate, an entity will continue to refer to the guidance in IFRS 10 and IAS 28, respectively. [IFRS 10, IAS 28]

Worked example – Sale of a single-property real estate entity

Consulting Company X decides to sell an apartment building to Buyer Y. Consulting Company X owns the building through a wholly owned subsidiary whose only asset is the building. The transaction is outside its ordinary consulting activities. [IFRS 3, IFRS 10, IAS 40]

Title transfers to Buyer Y at closing, and Consulting Company X has no continuing involvement in the operations of the property including through a leaseback, property management services, or seller-provided financing.

The arrangement consideration includes a fixed amount paid in cash at closing, plus an additional 5% contingent on obtaining a permit to re-zone the property as a commercial property. Consulting Company X believes there is a 50% chance that the re-zoning effort will be successful.

Under IFRS, Consulting Company X applies the deconsolidation guidance in IFRS 10 because the apartment building is housed in a subsidiary.

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Applying IFRS 15 to the transfer of a group of non financial assets that represents a business may result in different accounting
IFRS does not explicitly address how to calculate the gain or loss on the sale of a group of non financial assets that represents a business and is not housed in a subsidiary. Whether an entity currently applies the deconsolidation guidance or IAS 18 is not decisive, because the consideration is measured at fair value under both approaches.

However, the approach may differ under IFRS 15, because an entity applies the guidance on the transaction price. This guidance specifies that variable consideration is subject to the constraint, and may be measured at a lower amount than fair value.

Transfers to inventory are still possible if specific criteria are met
If an entity sells or transfers an item of property, plant, and equipment or an investment property, then it recognizes a gain or loss on disposal outside revenue. However, in limited circumstances it remains possible that an item may be transferred to inventory before sale, in which case an entity recognizes revenue on disposal – for example: [IAS 16.68A, IAS 40.58]

  • an entity that, in the course of its ordinary activities, routinely sells items of property, plant, and equipment that it has held for rental to others transfers these assets to inventory when they cease to be rented and become held for sale; and
  • an entity transfers investment property to inventory when there is a change of use evidenced by the start of development with a view to sale.
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IFRS 15 Sale of Non financial assets

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