Pinch plc owns a building which it has used for many years as a factory. On 1 January 2012 the building had a carrying value of €15m with an estimated useful economic life of 15 years. Pinch uses the cost model under IAS 16 to account for buildings.
On 1 April 2012 Pinch plc commenced operations in a new building, and the old one was placed on the market as it was no longer being used. The estimated proceeds of sale were €13 million, less selling costs of €0.2 million. It was seen as highly probable at that date that the building would sell at that price. By year end, 31 December 2012, the building remained unsold, so Pinch plc reduced the asking price to €11m. The estimate of selling costs remained the same. The directors of Pinch plc believed at that date it was highly probable the sale would occur within 12 months at the lower price.
The question, off course, is what the measurement of the old building should be in the books of Pinch plc for year ended 31 December 2012.
The accounting for the building is as follows based on IFRS 5:
The building qualifies for transfer to “held for sale” on 1 April 2012 as the two conditions were met at that date:
- It was available for immediate sale in its present condition at the date classification to ‘held for sale’ is made; and
- The sale was considered highly probable.
The carrying value on 1 April 2012 was €15 million less 3 month’s depreciation (15m * 1/15 * 3/12) of €0.25 million. Therefore the carrying value was €14.75 million. Always assume depreciation is calculated on a time-apportioned basis unless otherwise instructed.
The ‘fair value less costs to sell’ on 1 April 2012 was €12.8 million (13m – 0.2m). Therefore the initial value to be assigned to the non-current asset held for sale is €12.8 million (being the lower of (1) carrying value at date of transfer and (2) ‘fair value less costs to sell’).
The loss in value of €1.95 million (14.75m – 12.8m) is taken to profit or loss for the year.
No depreciation is charged from 1 April 2012.
At 31 December 2012, the next reporting date, the asset has not been sold. The applicability of the conditions is reviewed, and the fair value less costs to sell is also reviewed. Based on the failure to sell the asset, the price was reduced.
The conditions are still met in that:
- It is still available for immediate sale in its present condition; and
- The sale is still considered highly probable.
Therefore the classification continues to be ‘held for sale’, but the asset’s carrying amount is reduced to the revised ‘fair value less costs to sell’ of €10.8 million (11m – 0.2m). The further reduction in value of €2 million (12.8m – 10.8m) is taken to profit or loss for year ended 31 December 2012.