Section B: Q22

Specimen exam

Q22 Section B

2 marks

At a board meeting in June 20X3, Neutron Co's directors made a decision to close down one of its factories by 30 September 20X3 and market both the building and the plant for sale.

The decision had been made public, was communicated to all affected parties and was fully implemented by 30 September 20X3.

The directors of Neutron Co have provided the following information relating to the closure:

(1) Of the factory’s 250 employees, 50 will be retrained and deployed to other subsidiaries within the Neutron group during the year ended 30 September 20X4, at a cost of $125,000.

The remainder accepted redundancy at an average cost of $5,000 each.

(2) The factory’s plant had a carrying amount of $2.2m, but is only expected to sell for $500,000, incurring $50,000 of selling costs. The factory itself is expected to sell for a profit of $1.2m.

(3) The company also rented a number of machines in the factory under operating leases which have an average of three years to run after 30 September 20X3.

The present value of these future lease payments at 30 September 20X3 was $1m, however, the lessor has stated that they will accept $850,000 if paid on 30 October 20X3 as full settlement.

(4) Penalty payments, due to the non-completion of supply contracts, are estimated to be $200,000, 50% of which is expected to be recovered from Neutron Co’s insurers.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations prescribes the recognition criteria for non-current assets held for sale.

For an asset or a disposal group to be classified as held for sale, the sale must be highly probable.

Which TWO of the following must apply for the sale to be considered highly probable?

Pick 2 options