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TMI BlogDiscontinuing OperationsX X X X Extracts X X X X X X X X Extracts X X X X ..... tement. Definitions Discontinuing Operation 3. A discontinuing operation is a component of an enterprise: (a) that the enterprise, pursuant to a single plan, is: (i) disposing of substantially in its entirety, such as by selling the component in a single transaction or by demerger or spin-off of ownership of the component to the enterprise's shareholders; or (ii) disposing of piecemeal, such as by selling off the component's assets and settling its liabilities individually; or (iii) terminating through abandonment; and (b) that represents a separate major line of business or geographical area of operations; and (c) that can be distinguished operationally and for financial reporting purposes. 4. Under criterion (a) of the definition (paragraph 3 (a)), a discontinuing operation may be disposed of in its entirety or piecemeal, but always pursuant to an overall plan to discontinue the entire component. 5. If an enterprise sells a component substantially in its entirety, the result can be a net gain or net loss. For such a discontinuance, a binding sale agreement is entered into on a specific date, althoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solidated financial statements is selling a subsidiary whose activities are similar to those of the parent or other subsidiaries. 10. A reportable business segment or geographical segment as defined in Accounting Standard (AS) 17, Segment Reporting, would normally satisfy criterion (b) of the definition of a discontinuing operation (paragraph 3), that is, it would represent a separate major line of business or geographical area of operations. A part of such a segment may also satisfy criterion (b) of the definition. For an enterprise that operates in a single business or geographical segment and therefore does not report segment information, a major product or service line may also satisfy the criteria of the definition. 11. A component can be distinguished operationally and for financial reporting purposes - criterion (c) of the definition of a discontinuing operation (paragraph 3) - if all the following conditions are met: (a) the operating assets and liabilities of the component can be directly attributed to it; (b) its revenue can be directly attributed to it; (c) at least a majority of its operating expenses can be directly attributed to it. 12. Assets, liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors, trade unions, etc., in a sufficiently specific manner so as to make the enterprise demonstrably committed to the discontinuance. Recognition and Measurement 18. An enterprise should apply the principles of recognition and measurement that are set out in other Accounting Standards for the purpose of deciding as to when and how to recognise and measure the changes in assets and liabilities and the revenue, expenses, gains, losses and cash flows relating to a discontinuing operation. 19. This Standard does not establish any recognition and measurement principles. Rather, it requires that an enterprise follow recognition and measurement principles established in other Accounting Standards, e.g., Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date 33 and Accounting Standard (AS) 28, Impairment of Assets. Presentation and Disclosure Initial Disclosure 20. 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 event (as defined in paragraph 15) occurs: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disposal of assets or settlement of liabilities attributable to the discontinuing operation, (i) the amount of the pre-tax gain or loss and (ii) income (b) the net selling price or range of prices (which is after deductin g expected disposal costs) of those net assets for which the enterprise has entered into one or more binding sale agreements, the expected timing of receipt of those cash flows and the carrying amount of those net assets on the balance sheet date. 24. The asset disposals, liability settlements, and binding sale agreements referred to in the preceding paragraph may occur concurrently with the initial disclosure event, or in the period in which the initial disclosure event occurs, or in a later period. 25. If some of the assets attributable to a discontinuing operation have actually been sold or are the subject of one or more binding sale agreements entered into between the balance sheet date and the date on which the financial statements are approved by the board of directors in case of a company or by the corresponding approving authority in the case of any other enterprise, the disclosures required by Accounting Standard (AS) 4, Contingencies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lustrative Presentation and Disclosures 33. Illustration 1 attached to the Standard illustrates the presentation and disclosures required by this Standard. Restatement of Prior Periods 34. Comparative information for prior periods that is presented in financial statements prepared after the initial disclosure event should be restated to segregate assets, liabilities, revenue, expenses, and cash flows of continuing and discontinuing operations in a manner similar to that required by paragraphs 20, 23, 26, 28, 29, 31 and 32. 35. Illustration 2 attached to this Standard illustrates application of paragraph 34. Disclosure in Interim Financial Reports 36. Disclosures in an interim financial report in respect of a discontinuing operation should be made in accordance with AS 25, Interim Financial Reporting, including: (a) any significant activities or events since the end of the most recent annual reporting period relating to a discontinuing operation; and (b) any significant changes in the amount or timing of cash flows relating to the assets to be disposed or liabilities to be settled. Illustration 1 Illustrative Disclosures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssumed to illustrate the presentation and disclosures required by the Standard. 1. Financial Statements for 20X1 1.1 Statement of Profit and Loss for 20X1 The Statement of Profit and Loss of Delta Company for the year 20X1 can be presented as follows: (Amount in Rs. lakhs) 20X1 20X0 Turnover 140 150 Operating expenses (92) (105) Impairment loss (20) (---) Pre-tax profit from operating activities 28 45 Interest expense (15) (20) Profit before tax 13 25 Profit from continuing operations before tax 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 140 150 Operating Expenses (65) (60) (27) (45) (92) (105) Impairment Loss (---) (---) (20) (---) (20) (---) Pre-tax profit from operating activities 25 20 3 25 28 45 Interest expense (10) (8) (5) (12) (15) (20) Profit (loss) before tax 15 12 (2) 13 13 25 Income tax expense (7) (6) 1 (7) (6) (13) Profit (loss) from operating activities after tax 8 6 (1) 6 7 12 2. Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The disposal is consistent with the Company's long-term strategy to focus its activities in the areas of food and beverage manufacture and distribution, and to divest unrelated activities. On 30 September 20X2, the Company signed a contract to sell the Clothing Division to Z Corporation for Rs. 60 lakhs. Clothing Division's assets are written down by Rs. 10 lakhs (previous year Rs. 20 lakhs) before income tax saving of Rs. 3 lakhs (previous year Rs. 6 lakhs) to their recoverable amount. The Company has recognised provision for termination benefits of Rs. 30 lakhs (previous year Rs. nil) before income tax saving of Rs. 9 lakhs (previous year Rs. nil) to be paid by 30 June 20X3 to certain employees of the Clothing Division whose jobs will be terminated as a result of the sale. At 31 December 20X2, the carrying amount of assets of the Clothing Division was Rs. 80 lakhs (previous year Rs. 85 lakhs) and its liabilities were Rs. 35 lakhs (previous year Rs. 15 lakhs), including the provision for expected termination cost of Rs. 30 lakhs (previous year Rs. nil). The process of selling the Clothing Division is likely to be completed by 31 January 20X3. The following sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aph 34 requires that comparative information for prior periods that is presented in financial statements prepared after the initial disclosure event be restated to segregate assets, liabilities, revenue, expenses, and cash flows of continuing and discontinuing operations in a manner similar to that required by paragraphs 20, 23, 26, 28, 29, 31 and 32. 2. Consider following facts: (a) Operations A, B, C, and D were all continuing in years 1 and 2; (b) Operation D is approved and announced for disposal in year 3 but actually disposed of in year 4; (c) Operation B is discontinued in year 4 (approved and announced for disposal and actually disposed of) and operation E is acquired; and (d) Operation F is acquired in year 5. 3. The following table illustrates the classification of continuing and discontinuing operations in years 3 to 5: FINANCIAL STATEMENTS FOR YEAR 3 (Approved and Published early in Year 4) Year 2 Comparatives Year 3 Continuing Discontinuing Continuing Discontinuing A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A A A A B B B B C C C C C D D D D E E F ********** NOTES 33 All paragraphs of AS 4 that deal with contingencies are applicable only to the extent not covered by other Accounting Standar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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