Discontinued
Operation
Intermediate Accounting 3
Definition
- A discontinued operation is “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 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.
Component of an Entity
- 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 on-going
operations of the entity and the entity will have no
significant continuing involvement in that component
after disposal.
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
Timing of Reporting
- PFRS prohibits the retroactive classification as a
discontinued operation when the discontinued criteria
are met after the end of reporting period.
- If the discontinued criteria are met after the end of
reporting period, an entity shall not classify the
discontinued operation as held for sale in the current
financial statements.
Component Classified as
Held for Sale
- A component of an entity is classified as “held for
sale” if the carrying amount will be recovered
principally through a sale transaction rather than
through continuing use.
- For this to be the case, the component of an entity
must be available for immediate sale in the present
condition and the sale must be highly probable.
- In other words, the discontinued operation is
accounted for as a “disposal group classified as held
for sale”.
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. All other operations of
the entity are in the meat packing business.
Examples of Discontinued Operation
c. Selling by a communication 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
- An entity shall disclose a single amount comprising
the total 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.
- 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.
Disclosure about
Discontinued Operation
- The following details are disclosed in the notes to
financial statements:
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. Any impairment loss
Disclosure about
Discontinued Operation
- The impairment loss is recognized when as of the
end of reporting period and before the sale of the
discontinued operation, 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 of the
discontinued operation is higher than the carrying
amount of the net assets, the expected gain is not
recognized but only disclosed.
Disclosure about
Discontinued Operation
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. Such gain or loss is reported
as part of the discontinued operation.
d. The termination cost of employees and other costs
which are directly incurred as a result of the
discontinuance are shown as part discontinued
operation.
Disclosure about
Discontinued Operation
If a disposal group is classified as held for sale in the
current year, the results of the disposal group for prior
period shall be re-presented as relating to discontinued
operation in the comparative figures for the current
year’s income statement.
Presentation in Statement of
Financial Position
- An entity shall also present separately on the face of
the statement of financial position the following
information:
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 cost of disposal and their
carrying amount
Presentation in Statement of
Financial Position
c. Liabilities of the component separately from all
other liabilities
d. Non-depreciation - non-current assets of the
component held for sale shall not be depreciated
Presentation in Statement of
Financial Position
- The assets of the component shall be presented as a
single amount under current assets and the liabilities
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.
Presentation in Statement of
Financial Position
- If a disposal group 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.
- The presentation of the assets and liabilities of the
disposal group in the prior period is not changed.
Cash Flow Presentation
- 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
Abandoned Discontinued Operation
- PFRS prohibits non-current assets that will be
abandoned from being classified as held for sale
- However, the standard further provides that if the
assets to be abandoned are a major line of business or
geographical area of operations, they are reported in
discontinued operations at the date on which they are
actually abandoned
