Discontinued Operations

ICMAP Syllabus IFRS 5 Non-Current Assets Held for Sale And Discontinued Operations

 4. Reporting Financial Performance

 IFRS 5: Non-Current Assets held for Sale and Discontinued operations

 Scope and definitions

 Conditions of IFRS 5

 Transfer from IAS 16 (Property Plant & Equipment) to IFRS 5

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 (Partly) Dis-continued Operations

 When an entity plans to stop some part of its business, then it might affect its future cash
flows, profitability and overall financial situation.

 Therefore, users of financial statements, mainly investors, should be informed about these
events.

 That’s why IFRS 5 Non-Current Assets Held for Sale & Discontinued Operations was issued –
to highlight results of discontinued operations & to separate them from results of ongoing or
continuing activities.

* part of its business is referred to as “component”

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 Why Discontinued Operations are Reported Separately on
Income Statement
 Users use historic trends in profit or loss to make predictions about future performance.

 Information about items which may affect future results is therefore important.

 One of these is whether a company has discontinued a part of its business, and this will
not be present in the future.

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 What is A Discontinued Operation

IFRS 5 defines a discontinued operation as:

 A component (part) of an entity that has been disposed of or is classified as held for sale and:

 represents a separate major line of business

 represents a geographical area of operation

 is a subsidiary acquired exclusively with a view to resale

 Examples a major product line, a factory, a retail outlet or a development division.

© 2009 Prentice-Hall, Inc. 6–4

 Component of An Entity

A component of an entity comprises of :

(i) operations that can be clearly distinguished for financial reporting purposes, from
rest of entity.

(ii) It can be cash generating unit or group of cash generating units.

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 Examples of Discontinued Operations

1. Selling by an entity of all its radio stations. The entity’s remaining activities are tv channels

2. A company is engaged in commodity business, real estate, manufacturing and construction

business. Selling any of the four businesses is a discontinued operation.

Examples Which are not Discontinued Operations

3. Shifting a production facility from one location to another.
4. Closing a factory to achieve cost savings.

Balance Sheet Presentation (of a discontinued operation)

If assets of a discontinued operation are planned for sale, then the treatment will be similar as that
of “Non-Current Assets Held for Sale”. I.e. shown as single liner in non-current assets.

If assets of a discontinued operation are not planned for sale, they continue as non-current assets.
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 Accounting for Discontinued Operations
Discontinued Operation is disclosed separately on face of profit & loss:
This includes:

 profits or losses from the discontinued operations during the year

 gains or losses from disposal of components of discontinued operations.

 remeasurement of its assets to fair value less costs to sell.

 A single figure of overall profit / loss from above is shown separately in profit or loss section. It is
included after tax figure.

 If a component of an entity qualified as discontinued operation during the year, all of its
results, before & after classification, shall be reported as discontinued operations.
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 Income statement presentation (with a discontinued operation)

Continuing operations:
Revenue X
Cost of sales (X)
Gross profit X
Distribution costs (X)
Administration expenses (X)
Profit from operations X
Finance costs (X)
Profit before tax X
Income tax expenses (X)
Profit for the period from continuing operations X
Discontinued operations:
 Profit for the period from discontinued operations* X
 Total profit for the period X © 2009 Prentice-Hall, Inc. 6–8
 Direct Costs Associated With Disposal of a Component

Costs directly associated with disposal of a component should be shown as part of discontinued
operations. Examples of such costs include:

1. such items as severance pay or employee termination costs

2. additional pension costs employee relocation expenses

COMPARATIVE COSTS:
 If a component is discontinued, the entity shall re-present the disclosures for prior periods along
with current year.

 If a component is classified as discontinued operation after the reporting period but before
financial statements are issued, entity shall disclose information in notes as non-adjusting event
after reporting period. © 2009 Prentice-Hall, Inc. 6 – 9
 Example for Discussion
 During year to 30 September 2016 Price plc carried out a major reorganisation of its activities as follows:

 The only remaining manufacturing division of the company was closed down on 1 June 2016. As a result
of the closure Price’s only activity will be in retail.

 Owing to fierce competition, on 31 August 2016 it was decided to sell the only division that operated in
Europe. Company was confident of a sale within the year. The sale actually took place on 20 January 2017.

 Activities carried on by research division were terminated during the period. This division was one of a
number of smaller ones which operated from same location as the main headquarters of Price. All these
divisions use the same central accounting system and operating costs are allocated between them for
purpose of management accounts. Accounts for year ended 30 Sept 2016 were approved on 5 Jan 2017.

Required: Discuss how these events should be accounted for in financial statements of Price plc for the year
ended 30 September 2016 in relation to IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations.
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 Example for Discussion
Solution
(a) The closure of the only remaining manufacturing division amounts to the withdrawal from a particular line of business, and would
therefore be classed as a discontinued operation.

(b) The sale of the only division that operated in Europe amounts to the withdrawal from a geographical area of operation, and
would also be a discontinued operation. The fact the sale has not occurred by the end of the year means the division would be
classed as a disposal group held for sale. The actual date of sale is irrelevant.

(c) The activities carried on by the research division would not meet the definition of a component of an entity since its operations
do not appear to be clearly distinguishable from the other smaller ones which are operated from the same location in the main
headquarters of the company. Therefore, this division's closure would not be a discontinued operation.

Q: Identify the discontinued operations under each of the following:

a) Management is considering to sell loss-making division next year.
b) Company’s branch in Lahore was sold during the year due to
decision to close its operations from Lahore’s market.
c) Company holds redundant equipment which is offered at a
reasonable price and management expects to complete
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 Question
Angola’s car manufacturing operation has been making substantial
losses. Following a meeting of the board of directors, it was decided to
close down the car manufacturing operation on 31 March 2016. The
company’s reporting date is 31 December and the car manufacturing
operation is treated as a separate operating segment.

Required: Explain how decision to close car manufacturing operation

should be treated in Angola’s financial statements for the years ending
31 December 2015 and 2016.

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 Question
 [Answer: 2015: SOLD? = NO, Decision to Discontinue = NO Therefore, not disclosed as
Discontinued Operation
 2016: SOLD? = NO, Decided to Discontinue = YES Therefore, disclosed as Discontinued
Operation]

EXERCISE - DISCONTINUED OPERATIONS (PRESENTATION)

Umair Ltd produced cards & sold roses. However, half way through the year ended 31
March 2019, the rose business was closed and assets sold off, incurring losses on
the disposal of non-current assets of Rs.76,000 and redundancy costs of Rs.37,000.
The directors re-organized the continuing business at a cost of Rs.98,000.
Cards Roses
Revenues 650,000 320,000
Cost of Sales 320,000 150,000
Selling Expenses 60,000 90,000
Administrative Expenses 120,000 110,000
Finance Cost 17,000
Income Taxes 31,000 -
Required: Draft the statement of profit or loss for the year ended 31
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