Audit readiness (2)
Non-Current Asset Available for Sale
When an asset is being sold individually, IFRS 5 applies only if it is a non-current asset. When a group of assets is being disposed of in a single transaction, the classification and presentation requirements of IFRS 5 apply to the disposal group as a whole.
The subject matter for discussion on audit readiness this week is ' Noncurrent Assets Held for Sale '. This item falls within the scope of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
The audit practitioner would always aim at obtaining sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance report about Non-current Assets Held for Sale.
Non-current assets are assets that do not meet the definition of a current asset. An entity classifies an asset as current when:
1. It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
2. It holds the asset primarily for the purpose of trading;
3. It expects to realise the asset within twelve months after the reporting period; or
4. The asset is cash or a cash equivalent (as defined in IAS 7 Statement of Cash Flows), unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
One of the various tests the External Auditor may attempt at is the appropriateness of classification of items on the schedule of non-current assets available for sale. Items that meet the definition of current assets as defined above are not expected to be found on this list.
Other items to be excluded from the list are:
a) Assets arising from employee benefits;
b) Financial assets within the scope of IFRS 9 Financial Instruments or, for entities that have not yet adopted IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement;
c) Non-current assets that are accounted for in accordance with the fair value model in IAS 40 Investment Property (Note that when investment property is accounted for in accordance with the cost model in IAS 40, it falls within the scope of the measurement requirements of IFRS 5);
d) Non-current assets that are measured at fair value less costs to sell in accordance with IAS 41 Agriculture; and Items on the schedule of non-current available for sale, could be sold as individual item or as part of a disposal group.
A disposal group is 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. A disposal group may be a group of cash generating units, a single cash generating unit or part of a cash generating unit.
When an asset is being sold individually, IFRS 5 applies only if it is a non-current asset. When a group of assets is being disposed of in a single transaction, the classification and presentation requirements of IFRS 5 apply to the disposal group as a whole. Therefore, when a business is being sold, IFRS 5 applies to all recognised assets and liabilities of that business, including goodwill.
Except for entities in the construction and/or real estate businesses, noncurrent asset held for sale is usually not a material item on the financial statements of most entities.
Depending on the risk around the nature and size of non-current asset available for sale, the audit practitioner usually will plan to obtain a control assurance, or a substantive assurance or both assurances during the course of the assurance engagement.
The External Auditor may choose to test controls around Classification, Measurement and Presentation of items within this asset category. Entities should be able to provide process flowcharts or process narratives explaining the policies and processes around these areas.
The External Auditors would need to be assured that non-current assets classified as held for sale are:
A. Asset (or disposal group) that are available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups); and
B. The sale is highly probable.
IFRS 5 defines 'highly probable' as meaning “significantly more likely than probable”, where 'probable' means “more likely than not”. A number of specific conditions must be satisfied for the sale of a noncurrent asset (or disposal group) to qualify as highly probable:
A. The appropriate level of management must be committed to a plan to sell the asset (or disposal group);
B. An active programme to locate a buyer and complete the plan must have been initiated;
C. The asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value; and
D. The sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Compliance with the conditions above, must be evidenced by visible audit trail.
In the area of measurement, the External Auditors may be interested in the policies and procedures around:
1. Determination of fair values on individual assets held for sale or disposal groups
2. Measuring of costs to sell
3. Measuring gains or losses to disposal
4. Changes to a plan of sale
Entities are expected to present relevant, reliable and verifiable facts to the External Auditors to support their assertions. Auditors would ordinarily not accept assertions in a subject matter that falls outside a set threshold when compared to a chosen criteria.