Imagine you run a distribution business and you have just agreed, in principle, to sell your delivery division to a competitor. The deal includes twelve delivery vans sitting on your balance sheet at a combined £220,000. Your finance manager asks a simple question: do we keep depreciating these vehicles as normal, or does something change now that a sale is imminent? Get this wrong and you could overstate profit, confuse the buyer’s due diligence team, or breach loan covenants that rely on accurate asset values. This is exactly the situation IFRS 5 was written to solve.
What IFRS 5 Actually Does
IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, exists for one practical reason: once you have genuinely decided to sell something – a machine, a fleet, or an entire division – continuing to treat it like a normal long-term asset gives a misleading picture. Depreciation assumes you will keep using an asset for years to come. If you are actively trying to sell it within the next twelve months, that assumption no longer holds. IFRS 5 says: stop depreciating, reclassify the asset onto its own line as held for sale, and value it at whichever is lower – what it is currently worth on the books (carrying amount) or what you would actually get for it after selling costs (fair value less costs to sell).
The Tests You Must Pass First
- The asset (or disposal group) is available for immediate sale in its present condition – subject only to terms that are usual and customary.
- Management is committed to a plan to sell and an active programme to locate a buyer has been initiated.
- The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
- The sale is highly probable, expected to qualify for recognition as a completed sale within twelve months, and unlikely to undergo significant changes or withdrawal.
The test that trips up most SME owners is ‘highly probable’. A casual board discussion or an unsolicited verbal approach from a potential buyer is not enough. You need an approved disposal plan, an active search for a buyer at a reasonable price, and actions indicating significant changes to the plan are unlikely – typically supported by an active sale process or signed heads of terms.
Worked Example: Reclassifying the Delivery Fleet
Let’s put real numbers against this. Hartwell Distribution Ltd prepares accounts under IFRS and has agreed to sell its logistics division, including a fleet of twelve vans. On 15 June the board formally approved the plan to sell and instructed the team to market the fleet at market value; by 30 June, the company’s reporting date, a buyer has been identified and heads of terms signed, with completion expected within three months. The fleet has a carrying amount of £220,000 at 30 June. An independent valuer estimates the vans would fetch £210,000, and the company expects to incur £15,000 in directly attributable, incremental costs to sell (such as broker fees, transport, and legal expenses).
| Fair value of the fleet (independent valuation) | £210,000 |
| Less: estimated costs to sell (broker fees, transport, legal costs) | £(15,000) |
| Fair value less costs to sell | £195,000 |
| Carrying amount at 30 June | £220,000 |
| Impairment loss to recognise | £25,000 |
Because fair value less costs to sell (£195,000) is lower than the carrying amount (£220,000), IFRS 5 requires Hartwell to write the fleet down by £25,000 upon classification as held for sale. This impairment loss goes straight through the profit and loss account in the period the classification occurs – it is not spread over future periods, and it is recognised even though the sale has not yet formally completed.
| Account | Dr | Cr |
|---|---|---|
| Impairment loss (profit and loss) | £25,000 | |
| Delivery fleet (non-current assets) | £25,000 |
Write the fleet down to fair value less costs to sell upon classification as held for sale
| Account | Dr | Cr |
|---|---|---|
| Assets held for sale (current assets) | £195,000 | |
| Delivery fleet (non-current assets) | £195,000 |
Reclassify the fleet from non-current assets to assets held for sale
| Financial statement item | Before reclassification (30 June) | After reclassification (30 June) |
|---|---|---|
| Non-current assets – delivery fleet | £220,000 | £0 |
| Current assets – assets held for sale | £0 | £195,000 |
| Impairment loss (profit and loss) | £0 | £25,000 |
| Depreciation charge on the fleet | Continues as normal | Stops once classified as held for sale |
Key mistakes we see regularly: continuing to charge regular depreciation instead of recognising the immediate impairment write-down upon classification, which overstates profit and carrying values; forgetting that costs to sell must be incremental direct costs, mistakenly including general overheads or omitting realistic disposal costs; and classifying assets as held for sale too early, before a sale is genuinely highly probable. Also note that IFRS 5 applies specifically under IFRS; under UK GAAP (FRS 102), there is no ‘held for sale’ category, and assets continue to be depreciated until disposal while being tested for impairment. Finally, if the division being sold represents a separate major line of business, you will also need to present its results as a discontinued operation in the statement of comprehensive income, separately from continuing operations.
Why This Matters Beyond the Balance Sheet
This is not just a technical exercise for your accountant. A buyer’s due diligence team will expect to see the fleet, and the rest of the division’s assets, clearly separated and realistically valued; getting ahead of this builds trust and speeds up negotiations. A lender relying on asset cover in your loan covenants needs an accurate current value, not an inflated historic cost. And your own management accounts will be more useful if they reflect commercial reality: an asset you are selling in the next few months behaves very differently from one you plan to keep running for the next five years. Applying IFRS 5 properly, as soon as the criteria are met, keeps your financial reporting honest and strengthens your position at the negotiating table.
Actionable Takeaways
- Once all IFRS 5 criteria are met – including that the asset is available for immediate sale and the transaction is highly probable – cease depreciating the asset and reclassify it.
- Always value held-for-sale assets at the lower of carrying amount and fair value less costs to sell, restricting costs to sell strictly to incremental direct disposal expenses such as broker commissions, legal fees, or direct transport.
- Reclassify the asset onto a separate ‘assets held for sale’ line presented within current assets so your balance sheet reflects what buyers and lenders need to see.
- If you are selling an entire division rather than an individual asset, determine whether it represents a disposal group and whether it qualifies as a discontinued operation, which requires separate single-line presentation in profit or loss.
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Our team helps SME owners and finance managers apply IFRS 5 and other reporting standards correctly before due diligence begins, so you go into negotiations with confidence.
