ACCA Strategic Business Reporting (SBR) Practice Exam

What should an entity do regarding subsequent downwards movement in the fair value of a held for sale asset?

1. Recognise it as a loss in profit and loss

2. Adjust it against equity

3. Ignore it until the asset is sold

4. Re-evaluate the asset every quarter

The correct answer is: Recognise it as a loss in profit and loss

When an entity holds an asset for sale, it is required to measure that asset at the lower of its carrying amount and its fair value less costs to sell. If there is a subsequent downward movement in the fair value of a held-for-sale asset, it must recognize this reduction as a loss in the profit and loss statement. This reflects the entity's current financial position accurately and complies with the relevant financial reporting standards, which emphasize the need for timely recognition of losses to ensure that stakeholders have a true representation of the entity’s financial performance. By recognizing the loss in profit and loss, the entity adheres to the principle of prudence, ensuring that potential losses are accounted for as they occur rather than deferring recognition until the asset is sold. This approach helps maintain transparency in financial reporting and provides users of the financial statements with pertinent information regarding the asset's performance and the overall financial health of the entity. In contrast, adjusting losses against equity or ignoring them until the asset is sold doesn't provide an accurate picture of the entity's financial situation. Similarly, the notion of re-evaluating the asset every quarter could be misleading, as the immediate recognition of losses is the required action under the relevant accounting standards.