Held for Sale Accounting under US GAAP

Overview

When a company decides to sell part of its business, those assets don’t just sit on the balance sheet the same way anymore. Under US GAAP, they may need to be reclassified as “held for sale”—a designation that changes how they’re measured, presented, and disclosed.

This article walks you through the six criteria that must be met for held-for-sale classification and the resulting accounting treatment.

Watch our video walkthrough on held for sale accounting:

What Causes Held-For-Sale Classification?

Let’s imagine that a company has decided to sell or spin-off underperforming parts of its business, which could include examples like an unsuccessful product line, an underperforming location/geography, or an entire business/entity.

Prior to the decision to sell, the related assets are performing within the normal operations of the business, similar to all other assets owned by the company. At this point, the assets are in their default US GAAP classification, which is referred to as “held and used.” Long-lived assets, like fixed assets and intangible assets, are recorded at their carrying value and depreciated/amortized over their estimated useful life.

However, as the company makes the decision to sell those assets, and takes more steps to get those assets ready to sell, they no longer should be viewed as “held and used” like the rest of the company’s normal operations. Instead, they could begin to be considered as assets that are ready for sale, or rather “held for sale,” under US GAAP.

Criteria of Held-for-Sale Classification

It is not simple enough as management picking a group of assets, and making the decision to sell those assets, that results in “held-for-sale” classification. As with most other US GAAP topics, there is a specific and complex framework with a list of 6 criteria, all of which must be met:

1. 1Management Commitment to a Plan
2. 2Ready for Sale
3. 3Plan to Sell Initiated
4. 4Sale Probable within 1 Year
5. 5Actively Marketed at Fair Value
6. 6Unlikely to Significantly Change or Withdrawal the Plan

Criteria #1: Management Commitment to a Plan

First, the company’s Management must have developed a plan to sell the assets and have committed to that plan. This generally needs to be a formal written plan, and such is evidenced by a document, discussion in board minutes, or otherwise.

An important clarification here is that Management must also have the authority to approve such a plan. This may be straightforward for smaller businesses, but many larger businesses require the approval of the board and/or shareholders for such a plan. If the appropriate approvals are not obtained, then the criteria is not met.

Criteria #2: Ready For Sale

The assets to be sold must be at a point in the process where they are available for immediate sale in their present condition. This means that it won’t take significant time and effort to get the assets ready to transfer over to the buyer, other than completing various administrative tasks (e.g., due diligence, document signatures, miscellaneous license/permit transfers, etc.).

Criteria #3: Plan to Sell Initiated

The company must be already acting on its plan to sell the assets. More specifically, there must be an active program that has already begun to locate a buyer, at a minimum, as well as any other actions that may be required to complete the plan for sale.

Criteria #4: Sale Probable Within 1 Year

It must be determined “probable” that the sale of the asset will occur within 1 year. This means that the sale is expected to be closed and completed within that time frame.

Determining the likelihood of whether an event is “probable” tends to be a subjective consideration, and depends on your understanding of the facts and circumstances around the situation. Under US GAAP, “probable” is considered likely (~75% probability) to occur.

You should consider whether other events have occurred, or other criteria have been met, that may support your assessment (e.g., see following criteria).

Criteria #5: Actively Marketed at Fair Value

Assuming that the assets are already being marketed for sale to potential buyers (see Criteria #3 above), another requirement is that its marketed price reflects its current fair value. If the assets are marketed for an unreasonably high price, well above what others expect to pay for it, then it is unlikely that a sale will occur. This impacts other criteria as well.

This determination should consider the market activity to date, including whether the company has received bids/offers from potential buyers that meet, or are reasonably close to, the amount that the company believes its assets are worth.

Criteria #6: Unlikely to Significantly Change/Withdraw Plan

The last criteria considers the remaining path to a sale. When the company’s management made the decision to sell the assets, their plan likely involved certain terms and conditions that they considered necessary, as well as nice-to-have, to enact a successful sale. This could include terms such as including/excluding a Transition Services Agreement, a price floor where any offers below are unacceptable, certain assets required to be sold together, and many other possibilities.

If the current deals to sell are not within the company’s previously approved guidelines, then this leaves significant uncertainty on whether the company could decide to not move forward with the sale, or if they need to go back and change the plan (at the risk of disagreement and indecision).

Assessing this item can show why it is important to have a formal, documented sale plan that can be referred to in such situations.

Conclusion

Meeting all 6 of the above criteria, and obtaining the related documentation and evidence for your assessment, can be a difficult hurdle to overcome. However, this becomes more and more likely to be met as a sale of assets gets closer and closer to the finish line.

Once you do reach the potential of all criteria being met, the assets from that point on are classified as “held for sale.”

In addition to the specific accounting here, it is worth remembering that these held-for-sale criteria are also used in determining whether a part of a company’s business should be considered as a Discontinued Operation under US GAAP. For more information on that assessment, check out our article here.

Accounting Treatment for Held-For-Sale Assets

Once held-for-sale classification is determined for an asset group, the question then becomes… what next?

At this point, the assets to be sold must be adjusted. They are no longer held at their carrying values, as they were when “held and used.” Instead, they must be remeasured at their fair value, less any costs to sell (e.g., any expected sale/broker commissions).

You must continue to remeasure the held-for-sale assets at their fair value, less costs to sell, and with any changes recorded as a gain/loss in the current period, until they are ultimately sold. However, it should be noted that, if plans change for the assets, and they no longer meet all of the held-for-sale criteria, then they may be required to be reclassified back to their original “held and used” classification.

Finally, any assets and liabilities related to a held-for-sale asset group are required to be presented as a separate Balance Sheet line item from the company’s other assets and certain footnote disclosures are required.

As you may see, if you are considering a sale/spinoff, wind-down, or other form of disposal for certain parts of business, the evaluation under US GAAP can be complex, and the resulting financial reporting can be extensive. So, make sure you take the time to review accordingly.