DISCONTINUED

OPERATION
MARLON M. DECILLO, CPA
LEARNING OBJECTIVES
At the end of the topic, students should be able to:
 Understand the concept of a discontinued operation.
 Know the recognition of a discontinued operation.
 Know the presentation of discontinued operation in the income
statement.
 Know the presentation of discontinued operation in the statement of
financial position.
 Know the presentation of a discontinued operation in the statement of
cash flows.
DISCONTINUED OPERATION
 defined as a component of an entity that either has been
disposed of or is classified as held for sale and:
a. Represents a separate major line of business or geographical
area of operations.
b. Is part of a single co-ordinated plan to dispose of a separate
major line of business or geographical area of operations.
c. Is a subsidiary acquired exclusively with a view to resale
COMPONENT CLASSIFIED AS HELD FOR SALE
The discontinued operation is accounted for as a disposal group
classified as held for sale.
The component of an entity must be available for immediate sale in
the present condition and the sale must be highly probable.
TIMING OF REPORTING
A component of an entity is classified as discontinued operation at
the date:
a. When the entity has actually disposed of the operation.
b. When the operation meets the criteria to be classified as held for
sale.
COMPONENT OF AN ENTITY
A component of an entity may be G subsidiary, a major line of
business or geographical segment whose operations and cash flows
can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity.
EXAMPLES OF DISCONTINUED OPERATION
a. Selling by a diversified entity of a major division that represents
the entity's only activities in the electronics industry.
b. Selling by a meat packing entity of controlling interest in a
furniture entity.
c. Selling by an entity of all its radio stations.
d. A conglomerate is engaged in commodity business, re estate,
manufacturing and construction business.
EXAMPLES WHICH ARE NOT DISCONTINUED
OPERATION

a. Phasing out of product line within a product group.

b. Shifting of production or marketing activities for a particular
line of business from one location to another.
c. Closing of a facility, factory or branch to achieve productivity
improvement or other cost savings.
INCOME STATEMENT PRESENTATION
PFRS 5, paragraph 33, provides that an entity shall disclose a single
amount comprising the total of post-tax profit or loss of the
discontinued operation and the post-tax gain or loss recognized on
the measurement to fair value less cost of disposal or on the
disposal of the assets or disposal group constituting the
discontinued operation.
INCLUDED IN DISCONTINUED OPERATION
a. The amount of revenue, expenses and income or loss
attributable to the discontinued operation during the current
period and the related income tax.
b. An impairment loss is recognized when the fair value less cost
of disposal of the discontinued operation is lower than the
carrying amount of the net assets.
If the fair value less cost of disposal is higher than the carrying
amount the expected gain is not recognized.
c. Any gain or loss from the actual disposal of the asset and
settlement of the liabilities of a discontinued operation is
recognized on the date of sale or date of settlement.
d. The termination cost of employees and other costs which are
directly incurred as a result of the discontinuance.
PRESENTATION IN STATEMENT OF FINANCIAL
POSITION
a. Assets of the component held for sale separately from all other
assets.
b. Assets of the component held for sale are measured at the lower
of fair value less to cost of disposal and their carrying amount.
c. Liabilities of the component separately from all other liabilities.
d. Nondepreciation - noncurrent assets of the component held for
sale shall not be depreciated.
CASH FLOW PRESENTATION
PFRS 5, paragraph 33, provides that the net cash flows attributable
to the operating, investing and financing activities of a discontinued
operation shall be separately presented in the statement of cash
flows or disclosed or disclosed in the notes.
EXAMPLE:
Beta Company has two segments, A and B. On July 1, 2020, the board of directors of Beta decided to
dispose of Segment B, an apparel division. On October 1, 2020, Beta Company signed a contract to sell
Segment B but the sale is expected to be completed by January 31, 2021. On December 31, 2020, the
carrying amount of the assets of Segment B was P3,000,000 and the carrying amount of the liabilities was
P1,800,000. The fair value less cost of disposal of Segment B was P1,000,000. The sale contract required
Beta Company to terminate certain employees of Segment B. The expected termination cost is P150,000 to
be paid on June 30, 2021.
The accounting records of Beta Company showed the following information for 2020:
 
 
Segment A Segment B
Sales 5,000,000 3,000,000
Cost of goods sold 2,500,000 1,400,000
Expenses 1,000,000 500,000
Income tax 480,000 240,000
The income statement of Beta Company for the year ended December 31, 2020 will appear as follows:

BETA COMPANY
Income Statement
Year ended December 31,

Sales 5,000,000
Cost of Sales (2,500,000)
Gross Profit
2,500,000
Expenses (1,000,000)
Net Income before tax 1,500,000
tax expense ( 480,000)

Income from continuing operations 1,020,000

Income from discontinued operation, net of tax 510,000 (Note 20)
Net income 1,530,000
The notes to financial statements shall include the following disclosure with respect to the discontinued operation. (Note 20)

Sales - Segment B 3,000,000

Cost of goods sold (1,400,000)
Gross income 1,600,000
Expenses ( 500,000)
Impairment loss ( 200,000)
Employee termination cost ( 150,000)
Income tax ( 240,000)
Income from discontinued operation 510,000

Eair value less cost of disposal of Segment B 1,000,000

Carrying amount of net assets - Segment B ( 3M -1.8M) (1,200,000)
Impairment loss ( 200,000)
End of presentation.