Sales outside ordinary activities – best way of combining IFRS 15 IAS 16 IAS 38 and IAS 40

Sales outside ordinary activities

Certain aspects of IFRS 15 apply to the sale or transfer of non-financial assets – e.g. intangible assets and property, plant and equipment – that are not an output of the entity’s ordinary activities.

Under IFRS 15, the guidance on measurement and derecognition applies to the transfer of a non-financial asset that is not an output of the entity’s ordinary activities, Sales outside ordinary activitiesincluding:

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 the respective standard IAS 16, IAS 38 or IAS 40 (see Transfer of control).

The resulting gain or loss is the difference between the transaction price measured under IFRS 15 (using the guidance in 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 Step 3 – Determine the transaction price).

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.

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 the consolidation standards, respectively. (IFRS 10, IAS 28)

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If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and then leases it back, then both entities apply the guidance in the revenue standard to assess whether the transfer of the asset should be accounted for as a sale.

  • If the transfer leg qualifies as a sale, then the seller-lessee derecognises the asset and calculates any gain or loss under the leases standard.
  • If the transfer leg does not qualify as a sale, then the seller-lessee does not derecognise the asset. (IFRS 16.98–103)

Case – Sale of a single-property real estate (IFRS 3, IFRS 10, IAS 40 )

Consulting Company X decides to sell an office building to Buyer Y. X owns the building through a wholly owned subsidiary whose only asset is the building. The transaction is outside its ordinary consulting activities.

Title transfers to Y at closing and 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. X believes that there is a 50% chance that the rezoning effort will be successful.

When the sale is undertaken as a sale of the subsidiary X applies the deconsolidation guidance in the consolidation standard and measures the contract consideration at fair value.

Conversely, when the sale is undertaken as an asset sale, X applies the derecognition guidance in the property, plant and equipment standard and as part of determining the gain or loss from the transaction measures the consideration to be received in accordance with the requirements set out in Step 3 of the model.

Food for thought – Judgement required to identify ordinary activities (IFRS 15.BC53)

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 inSales outside ordinary activities 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 judgement.

In many cases, this judgement will be informed by the classification of a nonfinancial 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, whereas the sale or transfer of inventory will result in the recognition of revenue.

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Food for thought – Accounting for a non-current non-financial asset held for sale may result in a gain or loss on transfer of control because consideration may differ from fair value (IFRS 5)

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.

IFRS 15 does not override the 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 recognised 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.

Food for thought – Applying transaction price guidance on measuring consideration received or receivable (IFRS 5)

Under IFRS 15, an entity applies the guidance on the transaction price, including variable consideration and the constraint. This may result in the consideration initially being measured at a lower amount, with a corresponding decrease in any gain – particularly if the constraint applies.

In extreme cases, an entity may recognise a loss on disposal even when the fair value of the consideration exceeds the carrying amount of the item immediately before disposal.

Food for thought – Little difference in accounting for sales of real estate to customers and non-customers (IAS 16, IAS 40)

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) vs 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).

Something else -   Example accounting policies

Food for thought – Transfers to inventory are still possible if specific criteria are met (IAS 16.68A, IAS 40.58)

If an entity sells or transfers an item of property, plant and equipment or an investment property, then it recognises 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 the entity recognises revenue on disposal – for example:

  • 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, and only when, there is a change of use – e.g. the start of development with a view to sale.

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Sales outside ordinary activities

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