Fair Value Less Costs of Disposal

SM 8.
1 Fair Value Less Costs of Disposal
Fair value less costs of disposal
The following guidance is from US GAAP but is substantially in line with IFRS 5
Non-Current Assets Held For Sale and Discontinued Operations, and illustrates
how Fair Value Less Costs of Disposal is determined. Referencse are to FASB
Accounting Standards Codification (ASC)
60-10-35-43
A long-lived asset (disposal group) classified as held for sale shall be measured at
the lower of its carrying amount or fair value less cost to sell. If the asset (disposal
group) is newly acquired, the carrying amount of the asset (disposal group) shall
be established based on its fair value less cost to sell at the acquisition date. A
long-lived asset shall not be depreciated (amortized) while it is classified as held
for sale. Interest and other expenses attributable to the liabilities of a disposal
group classified as held for sale shall continue to be accrued.
360-10-35-38
Costs to sell are the incremental direct costs to transact a sale, that is, the costs that
result directly from and are essential to a sale transaction and that would not have
been incurred by the entity had the decision to sell not been made. Those costs
include broker commissions, legal and title transfer fees, and closing costs that
must be incurred before legal title can be transferred. Those costs exclude
expected future losses associated with the operations of a long-lived asset
(disposal group) while it is classified as held for sale. Expected future operating
losses that marketplace participants would not similarly consider in their estimates
of the fair value less cost to sell of a long-lived asset (disposal group) classified as
held for sale shall not be indirectly recognized as part of an expected loss on the
sale by reducing the carrying amount of the asset (disposal group) to an amount
less than its current fair value less cost to sell. If the sale is expected to occur
beyond one year as permitted in limited situations by paragraph 360-10-45-11, the
cost to sell shall be discounted.
360-10-35-39
The carrying amounts of any assets that are not covered by this Subtopic,
including goodwill, that are included in a disposal group classified as held for sale
shall be adjusted in accordance with other applicable GAAP prior to measuring the
fair value less cost to sell of the disposal group. Paragraphs 350-20-35-51 through
35-57 provide guidance for allocating goodwill to a lower-level asset group to be
EY Financial Reporting Developments - Impairment

SM 8.1 Fair Value Less Costs of Disposal
disposed of that is part of a reporting unit and that constitutes a business. Goodwill
is not included in a lower-level asset group to be disposed of that is part of a
reporting unit if it does not constitute a business.
Assets held for sale are initially measured at the lower of their carrying amount or
fair value less cost to sell. A loss should be recognized for any initial adjustment
of the long-lived asset’s (disposal group’s) carrying amount to its fair value less
cost to sell in the period the held for sale criteria are met. The fair value less cost
to sell of the long-lived asset (disposal group) should be assessed each reporting
period it remains classified as held for sale. Subsequent changes in the long-lived
asset’s fair value less cost to sell (increase or decrease) would be reported as an
adjustment to its carrying amount, except that the adjusted carrying amount should
not exceed the carrying amount of the long-lived asset at the time it was initially
classified as held for sale.
ASC 820 and fair value less costs to sell

The fair value less cost to sell measurement objective in ASC 360-20 consists of
two separate components — (1) fair value and (2) cost to sell. The fair value
component of this measurement should be determined in accordance with the
principles of ASC 820 (i.e., exit price, market participants assumptions, etc.) and
would include those costs that a willing buyer and willing seller would include in
pricing the asset (i.e., the cash flows assumed in estimating the terminal value of
the asset). Transaction costs expected to be incurred by the seller would be
included in the estimate of costs to sell for purposes of applying ASC 360-10.

Illustration 4-3: Measuring fair value less costs to sell

Assume NYI Corp. purchases real estate from NJD, Inc. for $500. Included in that
transacted fair value amount were certain costs that market participants consider in
pricing the asset. Also assume that costs to sell, as defined in ASC 360-10, are $15.
Assuming there was no bargain purchase, if NYI were to consider the real estate held for
sale immediately after acquiring it, the real estate’s fair value presumably would be $500.
Under ASC 360-10, however, the real estate held for sale would be measured at $485,
i.e., fair value ($500) less costs to sell ($15).
Costs to sell
Costs to sell are the incremental direct costs to transact a sale (i.e., the costs that
result directly from and are essential to a sale transaction and that would not have
been incurred by the entity had the decision to sell not been made). If the fair
value of the disposal group is measured by a current market value or by using
current selling prices for similar disposal groups, that fair value should be

considered to be a current amount; and therefore, the fair value and the costs to
sell usually should not be discounted.
Examples of costs to sell include:
• Broker commissions.
• Legal fees.
• Title transfer fees.
• Closing costs that must be incurred before legal title can be transferred. Costs
that generally do not qualify as selling costs include:
• Insurance.
• Security services.
• Utility expenses.
• Other costs of protecting or maintaining the assets during the holding period.
By reflecting costs to sell in the value of a long-lived asset (disposal group), they
are essentially being accrued. Accordingly, entities should make reasonable
estimates of such costs and only include them in the valuation when the costs are
probable and reasonably estimable. We recommend that entities establish
valuation accounts or contra-assets against the long-lived asset’s fair value, such
that when the costs to sell are actually incurred, the contra-asset is debited.
Initial adjustment to fair value less cost to sell and interaction

with other standards
A long-lived asset or disposal group should be measured at the lower of its
carrying amount or fair value less cost to sell. A loss should be recognized for any
initial adjustment of the long-lived asset’s (disposal group’s) carrying amount to
fair value less cost to sell in the period the held for sale criteria are met.

Illustration 4-4: Recording the initial adjustment to fair value less costs to sell

CHC Inc. operates two facilities that produce power tools and decides to consolidate its
operations. On 1 July 20X2, CHC Inc.’s board commits to sell a manufacturing facility
that has a carrying amount of $10 million. On 1 July 20X2, all of the held for sale criteria
are met so after adjusting the individual assets and liabilities of the disposal group in
accordance with generally accepted accounting principles; the entity estimates the fair

value of the facility at $9 million. The costs to sell the building, including brokers’
commissions, legal fees and other closing costs, total $1 million. Accordingly, the entity
records a $2 million loss (i.e., credit long-lived assets and debit loss on sale of facility) on
1 July 20X2, representing the excess of the $10 million carrying amount over the $8
million fair value less cost to sell. If the facility’s fair value less cost to sell was $12
million on 1 July 20X2, no gain would be recorded and the carrying value of the facility
would remain at $10 million. Additionally, costs to sell would be expensed as incurred or
deferred and expensed as part of the sale.

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SM 8.

1 Fair Value Less Costs of Disposal

Fair value less costs of disposal

EY Financial Reporting Developments - Impairment

ASC 820 and fair value less costs to sell

EY Financial Reporting Developments - Impairment

Examples of costs to sell include:

• Title transfer fees.

Initial adjustment to fair value less cost to sell and interaction

EY Financial Reporting Developments - Impairment

EY Financial Reporting Developments - Impairment

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