TAX IMPLICATIONS RELATED TO THE IMPLEMENTATION …

1 draft for comments The Malaysian Institute of Certified Public Accountants TAX IMPLICATIONS RELATED TO THE IMPLEMENTATION OF frs 5 : NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Prepared by: Joint Tax Working Group on FRS draft for comments Tax IMPLICATIONS RELATED to the IMPLEMENTATION of frs 5 : Non-current Assets Held for Sale and Discontinued Operations Contents Page No. 1 Introduction 1 Background of frs 5 Rationale Scope of frs 5 Definition of terms Effective date 1 1 2 2 2 Scope of the comments 2 3 Changes introduced by the FRS regime 3 Classification of assets HFS 3 a) Recovered through sale 3 b) Criteria to be classified as HFS 3 c) Meaning of highly probable 3 d) Sale completed after one year 4 e) Criteria must be met at balance sheet date 4 f) Exceptions: i) Abandoned assets should not be classified as HFS ii) Assets temporarily taken out of use 4 5 g) Tax IMPLICATIONS 5 Measurement of assets HFS and treatment of impairment losses or gains 6 a) Initial measurement 6 b) Impairment loss 6 c) Subsequent re-measurement 6 d) Gain on reversal 6 e) Not to depreciate 7 Changes to a plan of sale 7 a) Reasons for changes and frs 5 treatment 7 b) Tax IMPLICATIONS 8 draft for comments Contents Page No.

2 Presentation and disclosure 8 a) Overview 8 b) Presenting Discontinued Operations 8 c) Presentation of a non-current asset or disposal group classified as held for sale 11 4 Tax treatment before FRS IMPLEMENTATION 13 5 Tax issues arising from FRS IMPLEMENTATION 13 6 Situations where tax issues may arise after FRS IMPLEMENTATION 13 Tax treatment on classification of a non-current asset as held for sale 13 In the year that the asset is classified as HFS a) Temporary disuse b) Continued to be used c) Ceased to be used d) Proposals 13 14 14 16 16 In the year that the asset is actually disposed a) Temporary disuse b) Continued to be used c) Ceased to be used 16 16 17 18 Tax treatments in other countries a) United Kingdom b) Singapore c) Australia 20 Tax treatment of asset HFS if the asset is not subsequently sold 20 a) Asset previously temporarily disused 21 b) Asset previously continued to be used 21 c) Asset previously ceased to be used 21 d) Tax treatments in other countries 23 Tax treatment of impairment gains or losses 23 Summary of scenarios and tax treatments 24 Appendix i - iii draft for comments Tax IMPLICATIONS RELATED to the IMPLEMENTATION of frs 5 : Non-current Assets Held for Sale and Discontinued Operations 1 1.

3 Introduction Background of frs 5 Rationale a) frs 5 supersedes IAS 35 frs 5 is to specify the accounting for assets held for sale and the presentation and disclosure of discontinued operations. frs 5 supersedes IAS 35 Discontinuing Operations which was adopted as MASB 28 Discontinuing Operations in Malaysia. b) frs 5 requirements In the past, IAS 35 Discontinuing Operations provided for the disclosure of income and expenses relating to discontinuing operations in the income statement. There was no requirement for segregation of the assets and liabilities relating to discontinuing operations in the balance sheet. frs 5 provides for the following: i) Classification and measurement of the assets held for sale (HFS) in the balance sheet ii) Disclosure of assets and liabilities in the balance sheet and notes to the financial statement iii) Disclosure of income, expenses and cashflow in the income statement for discontinued operations Scope of frs 5 The objective of frs 5 (Para 1 frs 5 ) is to specify the accounting for assets held for sale , (HFS) and the presentation and disclosure for discontinued operations.

4 In particular, the FRS requires the following: Classification as HFS and measurement - assets that meet the criteria to be classified as HFS to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease; The measurement requirements for frs 5 do not apply to the following assets: (a) Deferred tax assets (FRS 112 Income Taxes); (b) Assets arising from employee benefits (FRS 119 Employee Benefits); draft for comments Tax IMPLICATIONS RELATED to the IMPLEMENTATION of frs 5 : Non-current Assets Held for Sale and Discontinued Operations 2 (c) Financial assets (FRS 139 Financial Instruments: Recognition and Measurement); (d) Investment property measured at fair value (FRS 140 Investment Property); (e) Biological assets (IAS 41 Agriculture); and (f) Contractual rights under insurance contracts (IFRS 4 Insurance Contracts).

5 Presentation in balance sheet - HFS to be presented separately on the face of the balance sheet; and Presentation of discontinued operations - the results of discontinued operations to be presented separately in the income statement. Definition of essential terms (a) Discontinued operation please refer to (b) below. (b) Disposal group please refer to (a) below. (c) Highly probable significantly more likely than probable. Please refer to (c) below. Effective Date frs 5 became operative for annual periods beginning on or after 1 January 2006. However, an entity can apply frs 5 for a period beginning before 1 January 2006 and should disclose that fact. 2. Scope of the comments The scope of the comments on frs 5 in this discussion paper is as follows: a) To highlight those areas where the tax law may be ambiguous or where no law has been provided when applied to situations envisaged by frs 5 b) To highlight those areas where the law is clear but where IMPLEMENTATION may not be cost effective c) To propose the different possible methods of tax treatment for each of the situations and to suggest the most appropriate tax treatment d) To recommend changes to the law or to the IRB departmental practices, if necessary, to facilitate the IMPLEMENTATION of frs 5 provisions draft for comments Tax IMPLICATIONS RELATED to the IMPLEMENTATION of frs 5 : Non-current Assets Held for Sale and Discontinued Operations 3 3.

6 Changes introduced by the FRS regime As mentioned in 1 above, the previous IAS 35 / MASB 28 provided only for disclosures of discontinued operations in the Income Statement. There was no requirement for classification of assets held for sale and for the measurement of these assets. The disclosure requirements were also less extensive. frs 5 introduced the following major changes: Classification of assets HFS a) Recovered through sale (Para 6 frs 5 ) An entity shall classify a non-current asset (or disposal group) as HFS if its carrying amount will be recovered principally through a sale transaction rather than through continuing use per Para 6 of the FRS note. 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.

7 The assets may include qualifying expenditure, non-qualifying expenditure, inventories, intangible assets, etc. This discussion paper is focused on the tax treatment of assets which are unclear. The tax treatments of assets which are clear such as those for non-qualifying assets, inventories, etc are not discussed here. The tax treatment for these assets will follow the general law and will depend on whether any gains on disposal or on deemed disposal are capital or revenue and realized or unrealised. b) Criteria to be classified as HFS - (Para 7 frs 5 ) Before an asset can be classified as being HFS, the assets must meet the following criteria: The assets (or disposal groups) must be 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 its sale must be highly probable per Para 7 of the FRS note.

8 C) Meaning of highly probable - (Para 8 frs 5 ) For the sale to be highly probable, i) the appropriate level of management must be committed to a plan to sell the assets (or disposal groups), draft for comments Tax IMPLICATIONS RELATED to the IMPLEMENTATION of frs 5 : Non-current Assets Held for Sale and Discontinued Operations 4 ii) The assets or (disposal groups) must be actively marketed for sale at a price that is reasonable in relation to its current fair value iii) The sale should be expected to qualify for recognition as a completed sale within one year from the date of classification iv) 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. d) Sale completed after one year (Para 9 frs 5 ) In most cases, the sale should be completed within a year because an asset HFS can only be classified as such when the sale is highly probable [ (b) above].

9 In practical terms, it usually means that asset is being actively sold or a sale & purchase agreement has been entered into. However, it is possible for the sale to be completed after one year. Para 9 frs 5 states that Events or circumstances may extend the period to complete the sale beyond one year. An extension of the period to complete a sale does not preclude an asset (or disposal group) from being classified as HFS . These disposals may give rise to complications in the tax treatments as discussed in (g) below. e) Criteria must be met at balance sheet date (Para 12 frs 5 ) To be eligible for being classified as HFS, the criteria in (b) above have to be met at the balance sheet date. Para 12 frs 5 states that If the above criteria are met after the balance sheet date, an entity shall not classify a non-current asset (or disposal group) as held for sale in those financial statements when issued.

10 F) Exceptions: i) Abandoned assets should not be classified as HFS (Para 13 frs 5 ) Any entity shall not classify as HFS a non-current asset (or disposal group) that is to be abandoned unless the disposal group to be abandoned meets the criteria of discontinued operations . Then, the entity shall present the results and cash flows of the disposal group as discontinued operations at the date on which it ceases to be used. Abandoned assets should be treated as normal assets for accounting purposes. draft for comments Tax IMPLICATIONS RELATED to the IMPLEMENTATION of frs 5 : Non-current Assets Held for Sale and Discontinued Operations 5 ii) Assets temporarily taken out of use should not be treated as abandoned (Para 14 frs 5 ) An entity shall not account for a non-current asset that has been temporarily taken out of use as if it had been abandoned. g) Tax IMPLICATIONS i) Still in use in the business When an asset is classified as HFS, it signifies an intention of the company to sell the asset.