Financial Asset and Liability Classification Standards
Understanding Current Assets and Liabilities
Current Asset Classification Criteria
An asset is classified as current when it satisfies any of the following criteria:
- It is expected to be realized, or intended for sale or consumption, during the entity’s normal operating cycle.
- It is held primarily for trading purposes.
- It is expected to be realized within twelve months from the balance sheet date.
- It is cash or a cash equivalent.
Defining the Normal Operating Cycle
The normal operating cycle of an entity is the period of time that elapses between the acquisition of assets, which fall into the production process, and the realization of products in the form of cash or cash equivalents. When this cycle is not clearly identifiable, it is assumed to be 12 months.
Current Liability Classification Criteria
A liability is classified as current when it satisfies any of the following criteria:
- It is expected to be settled in the entity’s normal operating cycle.
- It is held primarily for trading purposes.
- It must be settled within twelve months from the balance sheet date.
Accounting for Discontinued Operations
Reporting Discontinued Operations in the Income Statement
In line 18, “Result for the year from discontinued operations net of tax,” of the standard profit and loss account model, the company will include a single amount comprising:
- The result after tax of discontinued operations.
- The result after taxes recognized by the measurement to fair value less selling costs or by the sale or disposal by other means of assets or disposal groups constituting the discontinued activity.
The company will present in this line 18 the amount for the previous year for activities of a discontinued nature at the close of the year to which the annual accounts relate.
Defining a Discontinued Operation
A discontinued operation is any component of the company that has been disposed of by sale or other means, or has been classified as held for sale, and:
- Represents a line of business or geographic area that is significant and can be considered separately from the rest.
- Is part of a single, coordinated plan to dispose of or arrange for another way a significant line of business or geographical area of operation that can be considered separately from the rest.
- Is a subsidiary acquired exclusively with a view to selling it.
Note PGC No. 12: Revenues and Expenses
Revenues and expenses generated by non-current assets and disposal groups held for sale which do not meet the requirements to qualify as discontinued operations are recognized in the Profit and Loss account as appropriate according to their nature.
Non-Current Assets Held for Sale Classification
Criteria for Classification and Valuation
An asset is classified as a non-current asset held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Such assets shall be valued at the lower of the following two amounts: their carrying amount and fair value less selling costs. They are not depreciated, and appropriate valuation corrections shall be in place.
The carrying amount should not exceed the fair value less selling expenses.
Requirements for Non-Current Assets Held for Sale
- The asset must be available in its current condition for immediate sale.
- Its sale must be highly probable. The following circumstances must be met:
- The company has initiated a plan to sell the asset (is looking for a buyer and intends to sell the asset).
- The assets are offered for sale at a price similar to their expected fair value.
- The sale is expected to be completed within one year from the date of classification of the assets as available for sale, unless, due to events or circumstances beyond the control of the company, the sale period has to be extended, and there is sufficient evidence that the company remains committed to the sale plan.
- The company’s actions indicate that it is unlikely that it will abandon the sale plan, there will be no significant changes, or the asset is about to be withdrawn from sale.