You are on page 1of 0

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
PRESENTATION
AND
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










SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3202
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 to
make projections of an entitys cash flows, earnings-generating capacity, and
financial position by segregating information about discontinued assets and
operations 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 the
Impairment and Disposal of Long-Lived Assets.
2 Definitions
2.1 Component of an entity
Operations and cash flows that are clearly distinguishable from the remainder
of 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 for
reporting 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 attributed
to it.

Commentary
Elements are directly attributable to a component if they would be eliminated
when the component is discontinued.
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3203
2.2 Disposal group
A group of assets to be disposed of collectively in a single transaction, and
directly 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 a separate major line of business or geographical area of operations;
is part of a single co-ordinated plan to dispose of that line of business
or 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 or
geographical area of operations.
An operating segment (IFRS 8 Operating Segments), would normally
satisfy this criterion.
A part of a segment may also satisfy the criterion.
For an entity that does not report segment information, a major
product or service line may also satisfy the criteria of the definition.
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3204


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, but
always pursuant to an overall co-ordinated plan to discontinue the entire
component.
Illustration 1

2. General information

The consolidated financial statements of the Bayer Group as of December 31, 2006 have
been prepared pursuant to Section 315a of the German Commercial Code according to
the International Financial Reporting Standards (IFRS) of the International Accounting
Standards Board (IASB), London, which are recognized by the European Union, and the
Interpretations 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



SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3205
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 its
carrying 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 than
probable.

Commentary
Probable being more likely than not.
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3206
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 been
initiated.
The asset must be actively marketed for sale at a price that is reasonable
relative to its current fair value.
The sale should be expected to qualify for recognition as a completed sale
within 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 significant
changes 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 disposal
are 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 that
date 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 only
met after the reporting period.
However, if the criteria are met before the financial statements are authorised
for 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).
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3207
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 a
discontinued 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-current
assets (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 than
sold. An entity shall not account for a non-current asset that has been
temporarily 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 to
their present value.

Commentary
Any increase in the present value of the costs to sell arising from the passage
of time is treated as a financing cost.
3.4.3 Subsequent remeasurement
Assets and liabilities in a disposal group are remeasured in accordance with
applicable IFRSs before the fair value less costs to sell of the disposal group
is remeasured.
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3208
3.4.4 Impairment losses and reversals
Impairment losses for initial or subsequent write-downs to fair value less
costs 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 asset
meets the requirements of IFRS 5 and is classed as held for sale. On classification as
held for sale the fair value of the asset was $18 million and the entity expects to incur
costs 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, in
accordance 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 (or
against revaluation reserve if one exists for that asset) and then a further loss of $1
million would have been recognised in profit or loss bringing the asset to its fair value
less 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 at
the lower of:
its carrying amount before it was classified as held for sale, adjusted
for 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 ceased
to be met.
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3209
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) constituting
the 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 comprehensive
income or in the notes) into:
the revenue, expenses and pre-tax profit or loss of discontinued
operations;
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 as
relating to discontinued operations separately from continuing operations.
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3210


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 activities
of discontinued operations must be presented in a financial statement or in the
notes.

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 continuing
operations 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 assets
that 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 from
other assets in the statement of financial position.
The liabilities of a held for sale disposal group are similarly presented
separately 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 separately
disclosed either in the statement of financial position or in the notes.
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3211

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 comprehensive
income 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 the
caption in the statement of comprehensive income that includes that gain or loss.
The reportable segment in which the non-current asset (or disposal group) is
presented 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.

SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3212

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, and
a public announcement was made. On that date, the carrying amount of Segment Cs
assets was $105,000 and it had liabilities of $15,000. The estimated recoverable
amount of the assets was determined to be $85,000 and the directors of X concluded
that 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 it
had liabilities of $15,000. There was no further impairment between 5 November and
the end of the reporting period.
X decided to adopt the provisions of IFRS 5 by making the necessary disclosures in
the 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.

SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3213
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 of
Segment 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 and
alcoholic 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 its
liabilities were $15,000.
During 2007, Segment C earned revenues of $110,000 and incurred expenses of $ 115,000
resulting 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 outflow
from investing activities was XX, and cash inflow from financing activities was XX.

SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3214

Activity 1

Following on from Worked example 1 the following information relates to the financial
reporting 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 carrying
amount of Segment Cs net assets at that date was $70,000. The loss on disposal will
attract tax relief at 30%.
The sale contract obliges X to terminate the employment of certain employees of
Segment C, incurring an expected termination cost of $30,000, to be paid by 31 March
2009. This has not been accounted for as at the end of the reporting period and will
attract tax relief at 30%.
X has decided to make the disclosures required in respect of the profit or loss items in
the profit or loss.
Required:
Show how the above information should be reflected in the financial statements of
X for the reporting period ended 31 December 2008.

SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3215
Proforma solution
Income statement for the reporting period ended 31 December 2008

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 for
termination of
employment



Taxation (30%)


Note to the financial statements












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.
SESSION 32 IFRS 5 DISCONTINUED OPERATIONS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3216
Activity solution
Solution 1
Income statement for the reporting period ended 31 December 2008


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 for
termination of
employment
(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

Note to the financial statements
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 in
areas apart from the core business areas (cigarette and beverage manufacture and
distribution) that form the long-term direction of the Company. Further, Segment Cs rate
of 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 income
tax benefit of $9,000) to be paid by 31 March 2009 to certain employees of Segment C
whose 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.

You might also like