A discontinued operation is a component of an entity that either has been disposed of or is held for sale. It may be a subsidiary, or a major line of business or geographical area. It will have been a cash-generating unit (or group of cash-generating units) as defined in IAS 36 Impairment of Assets.
Disclosures of discontinued operations include:
- analysis of the post-tax profit or loss into revenue, expenses, pre-tax profit or loss, and the related income tax expense;
- the gain or loss recognised on measurement to fair value less costs to sell or on disposal, and the related income tax expense;
- net cash flows attributable to operating, investing and financing activities;
- assets held for sale separately from all other assets; and
- liabilities of a disposal group held for sale separately from all other liabilities.
As regards recognition and measurement, IFRS 5 does not establish any separate principles, but reliesupon those of IAS 36 Impairment of Assets and IAS 37 Provisions, contingent Liabilities and Contingent Assets, and also on IAS 19 Employees Benefits and IAS 16 Property, Plant and Equipment.
IAS 37 explains when a provision should be recognized on discontinuance. In particular, a restructuring provision should only include the direct expenditure arising form the restructuring which are both;
- Necessarily entailed by the restructuring, and
- Not associated with the ongoing activities of the enterprise
It may be necessary, on a discontinuance, to apply the provisions of IAS 36 in recognizing impairment losses.
Presentation and Disclosure
An enterprise should include the following information relating to a discontinuing operation in its financial statements beginning with the financial statements for the period in which the initial disclosure even occurs.
- A description of the discontinuing operation
- The business or geographical segment(s) in which it is reported in accordance with IAS 14
- The date and nature of the initial disclosure event
- The date or period in which the discontinuance is expected to be completed if known or determinable
- The carrying amounts as of the balance sheet date of the total assets and the total liabilities to be disposed of
- The amounts of revenue, expenses, and pre-tax profit or loss from ordinary activities attributable to the discontinuing operation during the current financial reporting period, and the income tax expense relating thereto.
- The amounts of net cash flows attributable to the operating, investing, and financing activities of the discontinuing operation during the current financial reporting period.
If the initial disclosure even occurs after the end of an enterprise’s financial reporting period but before the financial statements or that period are approved by the board of directors or similar governing body, those financial statements should include the disclosures specified above for the period covered by those financial statements.
Separate disclosure is required for each material discontinuing operation.
When assets are sold or liabilities settled in discontinuance, the pre-tax gain or loss, and the income tax expense relating to it must be disclosed on the face of the income statement but not as an extraordinary item. (Disclosures (a) to (g) above may be disclosed by note or on the face of the income statement).
For assets not yet sold but for which a binding sale agreement exists, the net selling prices and the expected date of receipt must be disclosed by note.
The accounting and auditing issues are mainly concerned with identifying the point in time at which the initial disclosure even occurs, and also ensuring that lonely appropriate costs are included in any provision for restructuring that is established. Appropriate formats must be used for the information to be disclosed.
The key auditing matters arising are that the auditors should confirm whether they agree with the company’s view as to the need for disclosure of proposed or actual discontinuance, and that they agree that the company’s disclosures are appropriate.
Typical procedures would include:
- Determine the client’s policies and procedures in respect of discontinuing operations
- Review board minutes and other relevant management documentation
- Make enquiries of management into significant disposals of assets and investments
- Examine after date information
- Verify the make up pf discontinuing operations by reference to supporting documentation.