Assets Held-for-Sale

Question

I am trying to learn a bit about company operations and finances. I doing some light reading on BMO's 2019 Annual Report to Shareholders. I just randomly chose a listed company; just start somewhere.

page 143 for the document. Under Assets Held for Sale:

Assets Held for Sale

Non-current non-financial assets classified as held-for-sale are measured at the lower of their carrying amount and fair value less costs to sell and arepresented within other assets in our Consolidated Balance Sheet. Subsequent to its initial classification, a non-current asset is no longer depreciatedor amortized, and any subsequent write-down in fair value less costs to sell is recognized in non-interest revenue, other, in our ConsolidatedStatement of Income.

What I am getting from this is that the bank can classify assets such as IP as held-for-sale, and they will be measured at the lower end of how much they can sell the asset for, subtract the cost of selling it. And as soon as they classify the asset as held-for-sale, the asset is considered to no longer depreciate.

Ok. My problem with this is lets say there is an asset "B", and I know that asset "B" worth 100 dollars for now, but it will depreciate quickly to 1 dollar due to "reasons". So why wouldn't the bank have the incentive to simply classify that this asset "B" is held-for-sale so that on the books it is still 100 dollars, but in reality it is worth far less than that.

"B" can rebound and worth more again, but then the bank can declassify the asset.

Am I understanding this correctly?

Answer 1

lower of their carrying amount and fair value less costs to sell

In accounting, lower does not mean "lower end". It means:

Whichever is lower:

• carrying amount; or
• fair value less costs.

"Carrying amount" loosely means the frozen book value.

"Fair value less costs" loosely means Mark-to-market value minus Transaction Cost to Sell.

but it will depreciate quickly to 1 dollar due to "reasons"

Then it will instantly affect the "fair value less costs", as the surveyed market value has changed.

It is also known as "impairment loss" which will instantly affect the "Carrying amount". "Impairment loss" is different from depreciation.

Either way, the lower of the two gets reduced.

The paragraph that you cited from the Annual Report were actually taken from https://www.iasplus.com/en/standards/ifrs/ifrs5

but then the bank can declassify the asset.

The company cant just classify and reclassify whenever they wish. As stated within that link, the conditons are:

• management is committed to a plan to sell;
• the asset is available for immediate sale;
• an active programme to locate a buyer is initiated;
• the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions);
• the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value; and
• actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn.