Chapter 3 — Held-for-Sale Classification Criteria and Related Measurement

3.3 Held-for-Sale Criteria

ASC 360-10 {ASC 205-20}

360-10-45-9 {205-20-45-1E} A long-lived asset (disposal group) to be sold {component of an entity or a group of components of an entity, or a business or nonprofit activity (the entity to be sold)}, shall be classified as held for sale in the period in which all of the following criteria are met:

Management, having the authority to approve the action, commits to a plan to sell the asset (disposal group) {entity to be sold}.
The asset (disposal group) {entity to be sold} is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups) {entities to be sold}. (See Examples 5 through 7 [paragraphs 360-10-55-37 through 55-42], which illustrate when that criterion would be met.)
An active program to locate a buyer {or buyers} and other actions required to complete the plan to sell the asset (disposal group) {entity to be sold} have been initiated.
The sale of the asset (disposal group) {entity to be sold} is probable, and transfer of the asset (disposal group) {entity to be sold} is expected to qualify for recognition as a completed sale, within one year, except as permitted by paragraph 360-10-45-11 {205-20-45-1G}. (See Example 8 [paragraph 360-10-55-43], which illustrates when that criterion would be met.) The term probable refers to a future sale that is likely to occur.
The asset (disposal group) {entity to be sold} is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a long-lived asset {an entity to be sold} is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset (disposal group) {entity to be sold}. A market price that is reasonable in relation to fair value indicates that the asset (disposal group) {entity to be sold} is available for immediate sale, whereas a market price in excess of fair value indicates that the asset (disposal group) {entity to be sold} is not available for immediate sale.
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

The sections below address the criteria for reporting a disposal group as held for sale. Because the held-for-sale criteria in ASC 360-10-45-9 and ASC 205-20-45-1E are the same, the discussion of the criteria in these sections applies to both disposal groups under ASC 360-10-45-9 and components of an entity under ASC 205-20-45-1E.

Real estate entities should consider the guidance in ASC 970-360. Specifically, ASC 970-360-35-3 states, in part:

The provisions in Subtopic 360-10 for long-lived assets to be disposed of by sale shall apply to a real estate project, or parts thereof, that is substantially completed and that is to be sold. The provisions in that Topic for long-lived assets to be held and used shall apply to real estate held for development, including property to be developed in the future as well as that currently under development, and to a real estate project, or parts thereof, that is substantially completed and that is to be held and used (for example, for rental).

Thus, the held-for-sale criteria discussed in the sections below do not apply to real estate projects, or portions of a real estate project, that are substantially complete and that are to be sold. These properties are considered held for sale regardless of whether they meet the held-for-sale criteria in ASC 360-10 (ASC 205-20).

3.3.1 Management, Having the Authority to Approve the Action, Commits to a Plan

To demonstrate that it is committed to a plan to sell, an entity should ensure that the plan is formal and documented, identify the assets (and liabilities) to be disposed of, and specify the actions necessary and expected timing to complete the plan. We believe that a request from the board of directors or management to explore options for selling would not constitute commitment to a plan to sell.

If, in addition to management approval, approval from the board of directors or shareholders to sell is required or is sought by management, we believe that this criterion cannot be met until such approval is obtained unless there is evidence that approval has been effectively obtained. Approval might be effectively obtained, for example, if approval from shareholders is required and shareholders holding a majority of the voting shares have signed irrevocable agreements stating that they will vote their shares in favor of the disposal.

Because of the increased governance power of the bankruptcy court or creditors’ committee, we believe that when an entity has filed for bankruptcy, the level of authority that can commit to a plan to sell may be the bankruptcy court or the creditors’ committee. Therefore, this criterion may not be met until such approval is obtained.

Because this criterion is related to an evaluation of the entity’s commitment to a plan to sell, the criterion in ASC 360-10-45-9(a) (ASC 205-20-45-1E(a)) may be met even if the entity is awaiting third-party approval to sell the disposal group (e.g., approval from a government agency, such as the Federal Trade Commission (FTC) or the Federal Communications Commission (FCC), or approval from a lender). However, an entity generally would have to assess any required third-party approval under criterion (d) (see Section 3.3.4) to determine whether the sale is probable.

3.3.2 Available for Immediate Sale in Its Present Condition

The assets to be sold are available for immediate sale if the entity has the intent and ability to sell them in their current condition. Some planned actions by the seller before a disposal may indicate that the assets are not available for immediate sale, while other planned actions in the normal course of business (i.e., usual and customary) might indicate that they are.

Example 3-1

Completion of Plant Overhauls Before Disposition by Sale

On March 1, 20X2, Company A announces plans to close and sell one of its manufacturing facilities. Company A will be required to perform certain major building and equipment overhauls so that it can market the facility effectively. The facility is closed on April 30, 20X2, and the overhauls are completed on May 31, 20X2. After the overhauls are completed, A begins marketing the facility and the facility is sold on July 15, 20X2.

In this example, the criterion in ASC 360-10-45-9(b) (ASC 205-20-45-1E(b)) would not be met as of March 31, 20X2, because the manufacturing facility is not “available for immediate sale in its present condition.”

Example 3-2

Capital Expenditures Related to a Held-for-Sale Component in the Normal Course of Business

Company G owns and operates cable television franchises throughout the United States. In June 20X7, G commits to a plan and enters into an agreement to sell its Midwestern franchises to Company J; the sale is subject to approval by the FCC. The sales agreement requires G, while waiting for regulatory approval, to continue to expand the cable networks of the franchises to be sold, since new subscribers are requesting service. Such capital expenditures are common to all cable franchises, and G would have to make these normal and customary expenditures even if it did not sell the franchises.

In this example, the criterion in ASC 360-10-45-9(b) (ASC 205-20-45-1E(b)) would be met because the capital expenditures that G is required to make are usual and customary for the operation of such assets.

Examples 5–7 in the implementation guidance in ASC 360-10-55-37 through 55-42 illustrate situations in which a disposal group is both available and not available for immediate sale in its present condition. Because the held-for-sale criteria in ASC 360-10 are the same as those in ASC 205-20, we believe that these examples also provide interpretive guidance that applies to disposals within the scope of ASC 205-20.

ASC 360-10

Example 5: Plan to Sell Headquarters Building

55-37 This Example illustrates the classification as held for sale of a long-lived asset (disposal group) in accordance with paragraph 360-10-45-9(b).

55-38 An entity commits to a plan to sell its headquarters building and has initiated actions to locate a buyer. The following illustrate situations in which the criterion in paragraph 360-10-45-9(b) would or would not be met:

The entity intends to transfer the building to a buyer after it vacates the building. The time necessary to vacate the building is usual and customary for sales of such assets. The criterion in paragraph 360-10-45-9(b) would be met at the plan commitment date.
The entity will continue to use the building until construction of a new headquarters building is completed. The entity does not intend to transfer the existing building to a buyer until after construction of the new building is completed (and it vacates the existing building). The delay in the timing of the transfer of the existing building imposed by the entity (seller) demonstrates that the building is not available for immediate sale. The criterion in paragraph 360-10-45-9(b) would not be met until construction of the new building is completed, even if a firm purchase commitment for the future transfer of the existing building is obtained earlier.

Example 6: Plan to Sell Manufacturing Facility With Backlog of Orders

55-39 This Example illustrates the classification as held for sale of a long-lived asset (disposal group) in accordance with paragraph 360-10-45-9(b).

55-40 An entity commits to a plan to sell a manufacturing facility and has initiated actions to locate a buyer. At the plan commitment date, there is a backlog of uncompleted customer orders. The following illustrate situations in which the criterion in paragraph 360-10-45-9(b) would or would not be met:

The entity intends to sell the manufacturing facility with its operations. Any uncompleted customer orders at the sale date would transfer to the buyer. The transfer of uncompleted customer orders at the sale date will not affect the timing of the transfer of the facility. The criterion in paragraph 360-10-45-9(b) would be met at the plan commitment date.
The entity intends to sell the manufacturing facility, but without its operations. The entity does not intend to transfer the facility to a buyer until after it ceases all operations of the facility and eliminates the backlog of uncompleted customer orders. The delay in the timing of the transfer of the facility imposed by the entity (seller) demonstrates that the facility is not available for immediate sale. The criterion in paragraph 360-10-45-9(b) would not be met until the operations of the facility cease, even if a firm purchase commitment for the future transfer of the facility is obtained earlier.

Example 7: Intent to Sell Acquired Real Estate Foreclosure

55-41 This Example illustrates the classification as held for sale of a long-lived asset (disposal group) in accordance with paragraph 360-10-45-9(b).

55-42 An entity acquires through foreclosure a real estate property that it intends to sell. The following illustrate situations in which the criterion in paragraph 360-10-45-9(b) would not be met:

The entity does not intend to transfer the property to a buyer until after it completes renovations to increase its sales value. The delay in the timing of the transfer of the property imposed by the entity (seller) demonstrates that the property is not available for immediate sale. The criterion in paragraph 360-10-45-9(b) would not be met until the renovations are completed.
After the renovations are completed and the property is classified as held for sale but before a firm purchase commitment is obtained, the entity becomes aware of environmental damage requiring remediation. The entity still intends to sell the property. However, the entity does not have the ability to transfer the property to a buyer until after the remediation is completed. The delay in the timing of the transfer of the property imposed by others before a firm purchase commitment is obtained demonstrates that the property is not available for immediate sale. The criterion in paragraph 360-10-45-9(b) would not continue to be met. The property would be reclassified as held and used in accordance with paragraph 360-10-45-7.

3.3.3 An Active Program to Locate a Buyer and Other Actions Required to Complete the Plan Have Been Initiated

To meet this criterion, an entity must be actively seeking a buyer. Different entities use different processes for identifying buyers. Some entities will direct their employees to market the assets to be sold, while others will hire third parties (e.g., investment bankers or brokers). Evidence that employees have been directed to meet with potential buyers or that third parties have been engaged to market the assets would indicate that the entity has an active program to locate a buyer.

3.3.4 The Sale Is Probable and Is Expected to Be Complete Within One Year

The meaning of the term “probable” in this context is the same as that in ASC 450-20-20 and refers to a future sale that is likely to occur. There is no bright-line or quantitative threshold for determining the meaning of probable; however, it is a higher threshold than more likely than not. This criterion is often the most difficult to assess because it requires management to consider the likelihood that the sale will be completed. As part of this assessment, management would typically consider factors such as its ability to close past sales transactions, the ability of other entities in the same or similar industries to complete sales transactions in the current environment, the market in which the entity operates, and the buyer’s ability to obtain any necessary financing. Entities should also consider whether third-party approval (e.g., approval from a government agency, such as the FTC or the FCC, or approval from a lender) may be required and the likelihood of obtaining such approval (see examples below). This criterion should also be considered in conjunction with criterion (e) (see Section 3.3.5) because the price at which the disposal group is being marketed is expected to affect the probability that the sale will occur.

Example 8 in the implementation guidance in ASC 360-10-55-43 illustrates situations in which proposed dispositions are not expected to qualify as completed sales.

ASC 360-10

Example 8: Proposed Disposition Not Expected to Qualify as Completed Sale

55-43 This Example illustrates the classification as held for sale of a long-lived asset (disposal group) in accordance with the criterion in paragraph 360-10-45-9(d). The following illustrates situations in which that criterion would not be met:

An entity that is a commercial leasing and finance company is holding for sale or lease equipment that has recently come off lease and the ultimate form of a future transaction (sale or lease) has not yet been determined.
An entity commits to a plan to sell an asset that is in use and lease back that asset; however, the transfer of the asset will not be accounted for as a sale and leaseback transaction because the buyer-lessor does not obtain control of the asset based on the guidance in paragraphs 842-40-25-1 through 25-3. The asset would continue to be classified as held and used following the appropriate guidance in Sections 360-10-35, 360-10-45, and 360-10-50.

To meet this criterion, the entity must also expect that the disposal group will be sold within one year from the date on which it meets the held-for-sale criteria. However, ASC 360-10-45-11 and ASC 205-20-45-1G contain an exception to the one-year requirement if the delay results from events or circumstances beyond the entity’s control and management continues to be committed to the plan of sale and is performing actions necessary to respond to the conditions causing the delay. See Examples 9–11 in the implementation guidance in ASC 360-10-55-44 through 55-49 below.

Example 8 in ASC 360-10 includes guidance on meeting this criterion for sale-and-leaseback transactions. The guidance differs depending on whether the entity is applying ASC 842 or ASC 840. Under ASC 842, if the entity plans to enter into a sale-and-leaseback transaction and it is probable that the sale requirements under ASC 842-20 will be met within a year, this criterion would most likely be met. (See Deloitte’s Roadmap Leases for more information.) Under ASC 840, if the entity plans to enter into a sale-and-leaseback transaction for more than a minor portion of a property, this criterion would not be met.

ASC 360-10 {ASC 205-20}

360-10-45-11 {205-20-45-1G} Events or circumstances beyond an entity’s control may extend the period required to complete the sale of a long-lived asset (disposal group) {an entity to be sold} beyond one year. An exception to the one-year requirement in paragraph 360-10-45-9(d) {205-20-45-1E(d)} shall apply in the following situations in which such {those} events or circumstances arise:

If at the date {that} an entity commits to a plan to sell a long-lived asset (disposal group) {an entity to be sold}, the entity reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset (group) {entity to be sold} that will extend the period required to complete the sale and both of the following conditions are met:
1. Actions necessary to respond to those conditions cannot be initiated until after a firm purchase commitment is obtained.
2. A firm purchase commitment is probable within one year. (See Example 9 [paragraph 360-10-55-44], which illustrates that situation.)
If an entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly impose conditions on the transfer of a long-lived asset (disposal group) {an entity to be sold} previously classified as held for sale that will extend the period required to complete the sale and both of the following conditions are met:
1. Actions necessary to respond to the conditions have been or will be timely initiated.
2. A favorable resolution of the delaying factors is expected. (See Example 10 [paragraph 360-10-55-46], which illustrates that situation.)
If during the initial one-year period, circumstances arise that previously were considered unlikely and, as a result, a long-lived asset (disposal group) {an entity to be sold} previously classified as held for sale is not sold by the end of that period and all of the following conditions are met:
1. During the initial one-year period{,} the entity initiated actions necessary to respond to the change in circumstances.
2. The asset (group) {entity to be sold} is being actively marketed at a price that is reasonable given the change in circumstances.
3. The criteria in paragraph 360-10-45-9 {205-20-45-1E} are met. (See Example 11 [paragraph 360-10-55-48], which illustrates that situation.)

Examples 9–11 in the implementation guidance in ASC 360-10-55-44 through 55-49 illustrate situations that may or may not qualify for an exception to the one-year requirement.

ASC 360-10

Example 9: Regulatory Approval of Sale Required

55-44 This Example illustrates an exception to the one-year requirement in paragraph 360-10-45-9(d) to complete the sale of a long-lived asset (disposal group) (see paragraph 360-10-45-11). The following illustrates situations in which the conditions for an exception to the criterion in paragraph 360-10-45-9(d) would be met.

55-45 An entity in the utility industry commits to a plan to sell a disposal group that represents a significant portion of its regulated operations. The sale will require regulatory approval, which could extend the period required to complete the sale beyond one year. Actions necessary to obtain that approval cannot be initiated until after a buyer is known and a firm purchase commitment is obtained. However, a firm purchase commitment is probable within one year. In that situation, the conditions in paragraph 360-10-45-11(a) for an exception to the one-year requirement in paragraph 360-10-45-9(d) would be met.

Example 10: Environmental Damage Identified During Buyer’s Inspection

55-46 This Example illustrates an exception to the one-year requirement in paragraph 360-10-45-9(d) to complete the sale of a long-lived asset (disposal group) (see paragraph 360-10-45-11). The following illustrates a situation in which the conditions for an exception to the criterion in paragraph 360-10-45-9(d) would be met.

55-47 An entity commits to a plan to sell a manufacturing facility in its present condition and classifies the facility as held for sale at that date. After a firm purchase commitment is obtained, the buyer’s inspection of the property identifies environmental damage not previously known to exist. The entity is required by the buyer to remediate the damage, which will extend the period required to complete the sale beyond one year. However, the entity has initiated actions to remediate the damage, and satisfactory remediation of the damage is probable. In that situation, the conditions in paragraph 360-10-45-11(b) for an exception to the one-year requirement in paragraph 360-10-45-9(d) would be met.

Example 11: Deterioration of Market Conditions

55-48 This Example illustrates an exception to the one-year requirement in paragraph 360-10-45-9(d) to complete the sale of a long-lived asset (disposal group) (see paragraph 360-10-45-11).

55-49 An entity commits to a plan to sell a long-lived asset and classifies the asset as held for sale at that date. The following illustrates situations in which the conditions for an exception to the criterion in paragraph 360-10-45-9(d) would or would not be met:

During the initial one-year period, the market conditions that existed at the date the asset was classified initially as held for sale deteriorate and, as a result, the asset is not sold by the end of that period. During that period, the entity actively solicited but did not receive any reasonable offers to purchase the asset and, in response, reduced the price. The asset continues to be actively marketed at a price that is reasonable given the change in market conditions, and the criteria in paragraph 360-10-45-9 are met. In that situation, the conditions in paragraph 360-10-45-11(c) for an exception to the one-year requirement in paragraph 360-10-45-9(d) would be met. At the end of the initial one-year period, the asset would continue to be classified as held for sale.
During the following one-year period, market conditions deteriorate further, and the asset is not sold by the end of that period. The entity believes that the market conditions will improve and has not further reduced the price of the asset. The asset continues to be held for sale, but at a price in excess of its current fair value. In that situation, the absence of a price reduction demonstrates that the asset is not available for immediate sale as required by the criterion in paragraph 360-10-45-9(b). In addition, the criterion in paragraph 360-10-45-9(e) requires that an asset be marketed at a price that is reasonable in relation to its current fair value. Therefore, the conditions in paragraph 360-10-45-11(c) for an exception to the one-year requirement in paragraph 360-10-45-9(d) would not be met. The asset would be reclassified as held and used in accordance with paragraph 360-10-35-44.

3.3.5 Actively Marketed at a Reasonable Price

The price at which the disposal group is being marketed indicates whether management is committed to selling it and the likelihood that a sale will be completed. A market price that is reasonable compared with the disposal group’s fair value indicates that it is available for immediate sale, whereas a market price in excess of fair value indicates that it is not available for immediate sale or that it is not probable that the sale will occur.

3.3.6 Unlikely That Significant Changes Will Be Made to the Plan or the Plan Will Be Withdrawn

As discussed above, we believe that for an entity to meet the criterion discussed in Section 3.3.1, it should have a formal and documented plan that identifies the assets (and liabilities) to be sold, actions necessary to complete the plan, and expected timing of the plan’s completion. Even when the plan is formal and documented, an entity must evaluate the plan to determine whether significant changes are unlikely. When evaluating this criterion, the entity should consider the specific facts and circumstances related to the plan as well as whether it has a history of changing its plans of sale. Further, entities undergoing or expecting management changes (e.g., new CEO, new board members) should consider whether new management will be committed to the plan or will seek to modify or withdraw the plan.

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