requires that management, having the authority to approve the action, must commit to a plan to sell the asset (disposal group). The plan should specifically identify (1) all major assets to be disposed of, (2) significant actions to be taken to complete the plan, including the method of disposition and location of those activities, and (3) the expected date of completion. Merely exploring or assessing the feasibility of a sale of a long-lived asset (disposal group) does not constitute a commitment to a plan to sell.
If the board of director’s approval for a plan of disposal is required by company policy or is sought by management, the commitment criterion generally is not met until such approval has been obtained. Similarly, if shareholder approval is required by company policy or is sought by management, the commitment criterion generally is not met until shareholder approval has been obtained. However, if management and the board of directors control a majority of the reporting entity’s voting shares, approval by management and the board of directors is usually sufficient, as shareholder approval would be considered perfunctory.
When formal approval of a sale is required to be obtained from a third party (e.g., a governmental agency or a lender) the nature and likelihood of the third party approval should be considered in determining whether management has the ability to commit to a disposal plan. Routine or perfunctory approvals normally do not impact management’s ability to commit to a plan to sell. Additionally, in situations where obtaining such approval could extend the period required to complete the sale beyond one year, it may still be appropriate to classify the disposal group as held for sale, provided a firm purchase commitment is probable within one year (see Example 9 of ASC 360-10-55-45
In bankruptcy proceedings, due to the increased power of the bankruptcy court or creditors’ committee, management may not have the level of authority to approve the sale of assets. Instead, this authority may be with the bankruptcy court or creditors’ committee. Therefore, the held for sale criteria may not be met if approval of the bankruptcy court or creditors’ committee has not yet been obtained.
Commitment to a plan after the balance sheet date (held for sale)
A reporting entity may commit to a plan to sell a long-lived asset (disposal group) shortly after its balance sheet date, but before issuance of its financial statements. In these situations, the long-lived assets (disposal group) should continue to be classified as held and used until the all held for sale criteria are met in the subsequent reporting period. The held and used classification determination made as of the balance sheet date should not be revised for a decision to sell the asset after the balance sheet date.
However, a plan to sell a held and used long-lived asset for a loss shortly after the balance sheet date should be evaluated to determine whether a held and used impairment existed as of the balance sheet date, as events or conditions arising after the balance sheet date often affirm conditions that existed as of the balance sheet date. Depending on the significance of the asset in relation to the overall asset group and the facts and circumstances surrounding the sale of the asset, it may be necessary to test the asset group under the held and used impairment approach as of the balance sheet date. If required to be tested for recoverability, estimates of future cash flows should reflect all available information based on facts and circumstances as of the balance sheet date, including the likelihood of the sale of the related asset. Furthermore, disclosures should be considered if a reporting entity determines that no impairment existed as of the balance sheet date, but the asset is subsequently sold for a loss shortly after year end.