DipIFR-Session32 d08 Discontinued Operations

7/27/2019 DipIFR-Session32 d08 Discontinued Operations

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SESSION 32 IFRS 5 DISCONTINUED OPERATIONS

Accountancy Tuition Centre (International Holdings) Ltd 2008 3201

Overview

Objective

To explain the need for IFRS 5 Non-current Assets Held for Sale and

Discontinued Operations.

INTRODUCTION

DEFINITIONS

HELD FOR SALE

CLASSIFICATION

PRESENTATIONAND

DISCLOSURE

Component

Disposal group

Discontinued operation

Reasons for issuing IFRS 5

Definitions

Held for sale non-current assets

Abandoned non-current assets

Measurement

Changes to a plan of sale

Purpose

Discontinued operations

Continuing operations

Held for sale non-current assets


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1 Introduction

1.1 Reasons for issuing IFRS 5

To establish principles for the classification, measurement and presentation of

held-for-sale non-current assets.

The information provided enhances the ability of users of financial statements tomake projections of an entitys cash flows, earnings-generating capacity, andfinancial position by segregating information about discontinued assets andoperations from the information about continuing operations.

Commentary

As part of a short-term convergence project with the Financial Accounting

Standards Board (FASB) in the United States, IFRS 5 was issued to achieve

substantial convergence with FASB Statement 144 Accounting for theImpairment and Disposal of Long-Lived Assets.

2 Definitions

2.1 Component of an entity

Operations and cash flows that are clearly distinguishable from the remainderof the entity both operationally and for financial reporting purposes.

Commentary

So a component will have been a cash-generating unit (or a group of cash-

generating units) when held for use.

2.1.1 distinguishable

A discontinued operation must be distinguishable operationally and forreporting purposes. This will be the case if:

its operating assets and liabilities can be directly attributed to it;

its income (gross revenue) can be directly attributed to it; and

at least a majority of its operating expenses can be directly attributedto it.

Commentary

Elements are directly attributable to a component if they would be eliminated

when the component is discontinued.


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2.2 Disposal group

A group of assets to be disposed of collectively in a single transaction, anddirectly associated liabilities that will be transferred in the transaction.

Commentary

Disposal may be by sale or otherwise.

The assets include goodwill acquired in a business combination if the group is:

a cash-generating unit to which goodwill has been allocated; or an operation within such a cash-generating unit.

2.3 Discontinued operation

A component of an entity that either:

has been disposed of; or is classified as held for sale,

and:

represents aseparate major line of business or geographical area of operations;

is part of asingle co-ordinatedplan to dispose of that line of businessor area of operations; or

is a subsidiary acquired exclusively with a view to resale.

Commentary

Discontinued operations may qualify as restructurings as defined by IAS 37

Provisions, Contingent Liabilities and Contingent Assets but not all

restructurings will be treated as discontinued operations.

2.3.1 separate

A discontinued operation must be a separate major line of business orgeographical area of operations.

An operating segment (IFRS 8 Operating Segments), would normallysatisfy this criterion.

A part of a segment may also satisfy the criterion.

For an entity that does not report segment information, a majorproduct or service line may also satisfy the criteria of the definition.


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Commentary

Business entities frequently close facilities, abandon products or even product

lines, and change the size of their work force in response to market forces.

These changes are not usually, discontinued operations but they can occur in

connection with a discontinued operation.

For example:

gradual or evolutionary phasing out of a product line or class of service;

discontinuance of several products within an ongoing line of business;

shifting of some production or marketing activities for a particular

line of business from one location to another;

closing of a facility to achieve productivity improvements or other

cost savings; and

sale of a subsidiary whose activities are similar to those of the parent or

other subsidiaries or associates within a consolidated group.

2.3.2 a single co-ordinated plan

A discontinued operation may be disposed of in its entirety or piecemeal, butalways pursuant to an overall co-ordinated plan to discontinue the entirecomponent.

Illustration 1

2. General information

The consolidated financial statements of the Bayer Group as of December 31, 2006 havebeen prepared pursuant to Section 315a of the German Commercial Code according tothe International Financial Reporting Standards (IFRS) of the International AccountingStandards Board (IASB), London, which are recognized by the European Union, and theInterpretations of the International Financial Reporting Interpretations Committee (IFRIC),in effect at the closing date.

Notes to the Consolidated Financial Statements of the Bayer Group 2006


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3 Held for sale classification

3.1 Definitions

Current asset:

expected realisation, sale or consumption:

in the normal operating cycle; or

within twelve months after the reporting period;

held primarily for trading purposes;

cash or a cash equivalent.

Non-current asset: An asset that does not meet the definition of a current asset.

A non-current asset (or disposal group) is classified as held for sale if itscarrying amount will be recovered principally through a sale transaction

rather than through continuing use.

Commentary

Non-current assets (or disposal groups) classified as held for sale will be

referred to more simply as held for sale non-current assets in this session.

3.2 Held for sale non-current assets

3.2.1 Recognition criteria

The asset must be available for immediate sale in its present condition.

Commentary

But may be subject to terms that are usual and customary for sales of such assets.

The sale must be highly probable. That is, significantly more likely thanprobable.

Commentary

Probable being more likely than not.


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3.2.2 Highly probable

Management must be committed to a plan to sell the asset.

Commentary

An exchange of non-current assets constitutes a sale transaction when the exchange

has commercial substance (IAS 16 Property, Plant and Equipment).

An active programme to locate a buyer and complete the plan must have beeninitiated.

The asset must be actively marketed for sale at a price that is reasonablerelative to its current fair value.

The sale should be expected to qualify for recognition as a completed salewithin one year from the date of classification.

Commentary

However, an extension period does not preclude classification as held for sale

if the delay is beyond managements control and there is sufficient evidence of

managements commitment to its plan.

The actions required to complete the plan should indicate that significantchanges to the plan or withdrawal from the plan are unlikely.

3.2.3. Assets acquired exclusively for disposal

Non-current assets acquired exclusively with a view to subsequent disposalare classified as held for sale at the acquisition date if:

the one-year criterion is met; and

it is highly probable that any other criteria that are not met at thatdate will be met within three months.

3.2.4 Events after the reporting period

Assets are not classified as held for sale if the recognition criteria are onlymet after the reporting period.

However, if thecriteria are met before the financial statements are authorisedfor issue, the notes shall disclose the facts and circumstances.

Commentary

The event is non-adjusting (see IAS 10 Events after the Reporting Period in

the next session).


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3.3 Abandoned non-current assets

An asset that is to be abandoned is not classified as held for sale.

Commentary

Its carrying amount will be recovered principally through continuing use.

However, a disposal group that is to be abandoned is treated as adiscontinued operation when it ceases to be used.

Commentary

Providing that the definition of a discontinued operation is met.

Non-current assets (or disposal groups) to be abandoned include non-currentassets (or disposal groups) that are to be used to the end of their economic life

and non-current assets (or disposal groups) that are to be closed rather thansold. An entity shall not account for a non-current asset that has beentemporarily taken out of use as if it had been abandoned.

3.4 Measurement

3.4.1 Principle

Held for sale non-current assets are carried at the lower of:

carrying amount; and

fair value less costs to sell.

Commentary

Immediately before initial classification as held for sale, carrying amount is

measured in accordance with applicable IFRSs.

3.4.2 Time value

If a sale is expected to occur beyond one year, costs to sell are discounted totheir present value.

Commentary

Any increase in the present value of the costs to sell arising from the passageof time is treated as a financing cost.

3.4.3 Subsequent remeasurement

Assets and liabilities in a disposal group are remeasured in accordance withapplicable IFRSs before the fair value less costs to sell of the disposal groupis remeasured.


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3.4.4 Impairment losses and reversals

Impairment losses for initial or subsequent write-downs to fair value lesscosts to sell must be recognised.

Commentary

Reversals are recognised, but not exceeding the cumulative impairment loss

that has been recognised.

3.4.5 Depreciation

Held for sale non-current assets are not depreciated (amortised).

Commentary

However, interest and other expenses attributable to the liabilities of a

disposal group will continue to be recognised.

Illustration 2

An entity is planning to sell an asset with a carrying value of $20 million. The assetmeets the requirements of IFRS 5 and is classed as held for sale. On classification asheld for sale the fair value of the asset was $18 million and the entity expects to incurcosts of $1 million in selling the asset.

What value should the asset be measured at in the financial statements and how

should any change in value be accounted for?

The asset should be measured at fair value less cost to sell of $17 million, inaccordance with IFRS 5. On initial recognition as a NCA held for sale it would have

been re-measured in accordance with the relevant standard, IAS 16, IAS 38 or IAS 40,and an initial loss of $2 million would have been recognised within profit or loss (oragainst revaluation reserve if one exists for that asset) and then a further loss of $1million would have been recognised in profit or loss bringing the asset to its fair valueless costs to sell.

3.5 Changes to a plan of sale

If held for sale recognition criteria are no longer met, that classification ceases.

A non-current asset that ceases to be classified as held for sale is measured atthe lower of:

its carrying amount before it was classified as held for sale, adjustedfor any depreciation, amortisation or revaluations that would have

been recognised had the asset not been classified as held for sale; and

its recoverable amount at the date of the decision not to sell.

Any adjustment to the carrying amount is included in income from

continuing operations in the period in which the held for sale criteria ceasedto be met.


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4 Presentation and disclosure

4.1 Purpose

To enable users of financial statements to evaluate the financial effects of:

discontinued operations; and

disposals of non-current assets (or disposal groups).

4.2 Discontinued operations

4.2.1 A single amount

A single amount in the statement of comprehensive income comprising:

post-tax profit or loss of discontinued operations;

post-tax gain or loss recognised on:

the measurement to fair value less costs to sell; or

the disposal of the assets (or disposal groups) constitutingthe discontinued operation.

Commentary

Where components of profit or loss are presented as a separate income

statement (as permitted by IAS 1) a section identified as relating to

discontinued operations is presented in that separate statement.

4.2.2 An analysis

An analysis of the single amount (either in the statement of comprehensiveincome or in the notes) into:

the revenue, expenses and pre-tax profit or loss of discontinuedoperations;

the gain or loss recognised on:

the measurement to fair value less costs to sell; or

the disposal of the assets or disposal group(s) constituting

the discontinued operation.

Commentary

Each with its related income tax expense.

If presented in the statement of comprehensive income it is identified asrelating to discontinued operations separately from continuing operations.


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Commentary

The analysis is not required for newly acquired subsidiaries meeting the held

for sale criteria on acquisition.

4.2.3 Net cash flows

Net cash flows attributable to the operating, investing and financing activitiesof discontinued operations must be presented in a financial statement or in thenotes.

Commentary

Comparative information must be re-stated for prior periods presented.

4.3 Continuing operations If an entity ceases to classify a component as held for sale, the results of

operations previously presented as discontinued are reclassified to continuingoperations for all periods presented.

Commentary

Amounts for prior periods are then described as having been re-presented.

Gains and losses on the remeasurement of held for sale non-current assetsthat do not meet the definition of a discontinued operation are included in

profit or loss from continuing operations.

4.4 Held for sale non-current assets

Commentary

The following requirements also apply to the assets of disposal groups

classified as held for sale.

4.4.1 Separate classification

Non-current assets classified as held for sale are to be shown separately fromother assets in the statement of financial position.

The liabilities of a held for sale disposal group are similarly presentedseparately from other liabilities in the statement of financial position.

Commentary

Offsetting of such assets and liabilities is strictly prohibited.

The major classes of held for sale assets and liabilities are separatelydisclosed either in the statement of financial position or in the notes.


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Commentary

This disclosure is not required for newly acquired subsidiaries meeting the

held for sale criteria on acquisition.

Any cumulative income or expense recognised in other comprehensiveincome relating to a held for sale non-current asset must be presented

separately.

Comparative information is not restated.

Commentary

Classification as held for sale is reflected in the period when the held for sale

recognition criteria are met.

4.4.2 Additional disclosures

Commentary

The following note disclosures are made in the period in which a non-current

asset is classified as held for sale or sold.

A description of the non-current asset.

A description of the facts and circumstances of the sale or expected disposal(and the expected manner and timing of that disposal).

Fair value gains or losses.

Commentary

If not separately presented in the statement of comprehensive income, then in thecaption in the statement of comprehensive income that includes that gain or loss.

The reportable segment in which the non-current asset (or disposal group) ispresented in accordance with IFRS 8 Operating Segments (if applicable).

If held for sale criteria are no longer met disclose:

the decision to change the plan to sell the non-current asset; the facts and circumstances leading to the decision; and the effect of the decision on the results of operations for the period

and any prior periods presented.


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Worked example 1

Entity X has three segments:

A Tobacco

B Alcohol

C Health foods

The following information relates to the reporting period ended 31 December 2007:

A B C$000 $000 $000

Revenue 200 180 110

Expenses 120 105 115

Taxation (30%) 24 22.5 (1.5)

Segment C is felt to be inconsistent with the long-term direction of the Company.Management has decided, therefore, to dispose of Segment C.

On 5 November 2007 the board of directors of X voted to approve the disposition, anda public announcement was made. On that date, the carrying amount of Segment Csassets was $105,000 and it had liabilities of $15,000. The estimated recoverableamount of the assets was determined to be $85,000 and the directors of X concludedthat a pre-tax impairment loss of $20,000 should be recognised. This was duly

processed in November and is included in the above amounts

At 31 December 2007 the carrying amount of Segment Cs assets was $85,000 and ithad liabilities of $15,000. There was no further impairment between 5 November andthe end of the reporting period.

X decided to adopt the provisions of IFRS 5 by making the necessary disclosures inthe notes to the accounts.

Required:

Show how the above information should be reflected in the financial statements of

X for the reporting period ended 31 December 2007.


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Worked solution 1

Income statement for the reporting period ended 31 December 2007

$000

Revenue 490

Expenses (320)

Impairment loss (20)

150

Taxation (30%) (45)

Profit for the year 105

Note to the financial statements

On 5 November 2007, the board of directors publicly announced a plan to dispose ofSegment C, the health foods division. The disposal is consistent with the Companys long-term strategy to focus its activities on the manufacture and distribution of cigarettes andalcoholic drinks and to divest unrelated activities. The Company is actively seeking a

buyer for Segment C and hopes to complete the sale by the end of September 2008.

At 31 December 2007, the carrying amount of the assets of Segment C was $85,000 and itsliabilities were $15,000.

During 2007, Segment C earned revenues of $110,000 and incurred expenses of $ 115,000resulting in a pre-tax operating loss of $5,000, with a related tax benefit to the entity of$1,500.

During 2007, Segment Cs cash outflow from operating activities was XX, cash outflowfrom investing activities was XX, and cash inflow from financing activities was XX.


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Activity 1

Following on from Worked example 1 the following information relates to the financialreporting period ended 31 December 2008 before taking into account the sale of

Segment C:A B C

$000 $000 $000

Revenue 230 195 90

Expenses 130 115 100

Taxation (30%) 30 24 (3)

On 30 September 2008 X sold Segment C to Z Corporation for $60,000. The carryingamount of Segment Cs net assets at that date was $70,000. The loss on disposal willattract tax relief at 30%.

The sale contract obliges X to terminate the employment of certain employees ofSegment C, incurring an expected termination cost of $30,000, to be paid by 31 March2009. This has not been accounted for as at the end of the reporting period and willattract tax relief at 30%.

X has decided to make the disclosures required in respect of the profit or loss items inthe profit or loss.

Required:

Show how the above information should be reflected in the financial statements ofX for the reporting period ended 31 December 2008.


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Proforma solution


Continuing

operations

(A and B)

Discontinued

operations

(C only)

Entity as a whole

2007 2008 2007 2008 2007 2008$000 $000 $000 $000 $000 $000

Revenue

Expenses

Impairment loss

Provision fortermination of

employment

Taxation (30%)


Focus

You should now be able to:

distinguish non-current assets, current assets and held for sale non-current assets;

recognise and measure held for sale non-current assets;

define discontinued operations in accordance with IFRS 5;

discuss the importance of identifying and reporting the results of discontinued operations.


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Activity solution

Solution 1


Continuing

operations(A and B)

Discontinued

operations(C only)

Entity as a whole

2007 2008 2007 2008 2007 2008

$000 $000 $000 $000 $000 $000

Revenue 380 425 110 90 490 515

Expenses (225) (245) (95) (100) (320) (345)

Impairment loss (20) (20)

Loss on disposal (10) (10)

Provision fortermination ofemployment

(30) (30)

155 180 (5) (50) 150 130

Taxation (30%) (46.5) (54) 1.5 15 (45) (39)

108.5 126 (3.5) (35) 105 91


On 30 September 2008 the Company sold its health food operations to Z Corporation for$60,000. The Company decided to dispose of Segment C because its operations are inareas apart from the core business areas (cigarette and beverage manufacture anddistribution) that form the long-term direction of the Company. Further, Segment Cs rateof return has not been equal to that of the Companys other two segments during the

period.

The loss on disposal of Segment C (before income tax benefit of $3,000) was $10,000.

The Company recognised a provision for termination benefits of $30,000 (before incometax benefit of $9,000) to be paid by 31 March 2009 to certain employees of Segment Cwhose jobs will be terminated as a result of the sale.

Commentary

The information on the face of the statement of comprehensive income is in excess of the

minimum required by IFRS 5.

As a minimum all that would be required would be the after tax loss of $35,000, with

the remaining disclosures made within the notes.

Documents

DipIFR-Session32 d08 Discontinued Operations