What is a Disposal Group?

Disposal Group

Share This...

Disposal Group

A disposal group, as defined by the International Financial Reporting Standards (IFRS), refers to a group of assets (and possibly liabilities) that an entity is looking to dispose of together as a group in a single transaction. This concept is covered under IFRS 5, which deals with Non-current Assets Held for Sale and Discontinued Operations.

A disposal group may be a division within a company, a subsidiary, or any other collection of assets and liabilities. The plan to sell or dispose must be at an advanced stage where it’s unlikely changes will be made, and the assets must be available for immediate sale in their present condition.

Once an asset (or disposal group) is classified as held for sale, it is no longer depreciated or amortized, and is measured at the lower of its carrying amount and fair value less costs to sell. If the carrying amount of the asset (or disposal group) is higher than its fair value less costs to sell, an impairment loss must be recognized.

This allows the organization to better reflect the true value of the assets on their books, providing more accurate information to investors and stakeholders.

Example of a Disposal Group

Suppose TechXYZ Corp., a large technology company, decides to sell its smartphone manufacturing division due to strategic shifts in the business. This division includes assets such as manufacturing equipment, patents, and a warehouse. It also has certain associated liabilities like outstanding debts to suppliers and warranty obligations for already sold products.

Together, the assets and liabilities of the smartphone division constitute a “disposal group” under IFRS 5 because they’re expected to be disposed of in a single transaction.

Now, let’s consider the accounting implications. Before the decision, suppose the carrying value (book value) of the assets is $20 million, and the liabilities are $5 million. Assume TechXYZ Corp. estimates the fair value of these assets (what they could be sold for in the current market) to be $15 million, and it’s estimated to cost $1 million to facilitate the sale (broker fees, legal costs, etc.)

The fair value less costs to sell would be $14 million ($15 million fair value – $1 million costs to sell). This is lower than the carrying amount of the net assets ($20 million assets – $5 million liabilities = $15 million net assets).

Therefore, TechXYZ Corp. needs to recognize an impairment loss of $1 million ($15 million carrying amount – $14 million fair value less costs to sell). This loss reflects the decrease in value of the disposal group due to the planned sale. Also, TechXYZ Corp. would stop any further depreciation or amortization of the assets in the disposal group.

This example simplifies the real-world complexities but gives a basic understanding of how a disposal group works. It’s important to note that exact procedures may vary and professional accounting advice should be sought in real-world situations.

Other Posts You'll Like...

Want to Pass as Fast as Possible?

(and avoid failing sections?)

Watch one of our free "Study Hacks" trainings for a free walkthrough of the SuperfastCPA study methods that have helped so many candidates pass their sections faster and avoid failing scores...