Chapter 9- Discontinued Operation

DISCONTINUED OPERATION CHAPTER 9

DISCONTINUED OPERATION Under Appendix A of PFRS 5, a discontinued operation is 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 geographical area of operations.

line

of

business

or

b. Is part of a ingle 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.

PFRS 5, paragraph 12, prohibits the retroactive classification as a discontinued operation when the discontinued criteria are met after the end of reporting period. Stated otherwise, if the discontinued criteria are met after the end of the reporting period, an entity shall not classify the discontinued operation as held for sale in the current financial statements

Component of an entity A component of an entity may be a 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. The component can be clearly distinguished operationally and for financial reporting purposes if the assets and liabilities and the revenue and expenses are directly attributable to the component.

Assets, liabilities, income and expenses are directly attributable to the component if they would be eliminated when the component is disposed of. Accordingly, a discontinued operation occurs when the operations and cash flows of that component have been or will be eliminated from the ongoing operations of the entity will have no significant continuing involvement in that component after disposal.

Examples of discontinued operation a. Selling by a diversified entity of

major division that represents the entity’s only activities I the electronics industry.

b. Selling by a meat packing entity of controlling interest in a furniture entity. All other operations of the entity are in the meat packing business.

c. Selling by an entity of all its radio stations. The entity’s remaining activities are television stations and a publishing house.

d. A conglomerate is engaged in commodity business, real estate, manufacturing and construction business. Selling of any of the four businesses is a discontinued operation.

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 saving.

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 to cost of disposal or on the disposal of the assets or disposal group constituting the discontinued operation.

• Simply stated, the income or loss from discontinued operation, net of tax shall be presented as a single amount in the income statement below the income from continuing operations.

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 assets 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 • PFRS 5, paragraph 38, provides that an entity shall also present separately on the face of the financial position the following information:

a. Assets of the component held for sae separately from all other assets. b. Assets of the component held for sale re 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.

PFRS 5, paragraph 3, provides that the assets of the component shall be presented as a single amount under current assets of the component shall be presented as a single amount under current liabilities. The assets and liabilities of the component cannot be offset against the other. PFRS 5, paragraph 40, further provides that if a disposal is classified as held for sale in the current year, an entity shall not reclassify or re-present the assets and liabilities of the disposal group for the prior period to reflect the “held for sale” classification in the statement of financial position as of the end of the current reporting period. In other words, the presentation of the assets and liabilities of the disposal group in the prior period is not changed.

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 in the notes.