Discontinued Operation

DISCONTINUED OPERATION
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.
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.
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.
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 packaging entity of controlling interest in a furniture entity.
All other operations of the entity are in the meat packaging business.
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.
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 related income tax.
b. Any Impairment Loss

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 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.
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.
PFRS 5, paragraph 34, provides that 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.
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.
ILLUSTRATION
Zeta Company has two segments, A and B. On July 1, 2017, the board of directors of Zeta decided to dispose of
Segment B, an apparel division.
On October 1, 2017, Zeta Company signed a contract to sell Segment B, but the sale is expected to be
completed by January 31, 2018.
On December 31, 2017, the carrying amount of the assets of Segment B but the sale is expected to be
completed by January 31,2018.
The fair value less cost of disposal of Segment B was 1,000,000.

The sale contract required Zeta Company to terminate certain employee of Segment B.
The expected termination cost is P150,000 to be paid on June 30,2018.
The accounting records of Zeta Company showed the following information for 2017:
SEGMENT A B
Sales 5,000,000 3,000,000
Cost of Sales 2,500,000 1,400,000
Expenses 1,000,000 500,000
Income Tax 480,000 240,000
ZETA COMPANY
Income Statement
Year ended December 31, 2017
Disclosure
The notes to financial statements shall include the following disclosure with respect to the discontinued
operation

Discontinued Operation

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Discontinued Operation

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DISCONTINUED OPERATION

A. when the entity has actually disposed of the operation

EXAMPLES OF DISCONTINUED OPERATION

b. Any Impairment Loss

EXAMPLES WHICH ARE NOT DISCONTINUED OPERATION

The fair value less cost of disposal of Segment B was 1,000,000.

The expected termination cost is P150,000 to be paid on June 30,2018.

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