Discontinued operation
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The document defines and discusses discontinued operations. A discontinued operation represents a component of a business that has either been disposed of or is classified as held for sale. It must represent a separate major line of business, geographical area, or subsidiary acquired for resale. The key aspects of accounting for discontinued operations are separately presenting their performance and cash flows. The timing of reporting a discontinued operation depends on whether it has been disposed of or meets the criteria to be classified as held for sale.
Discontinued operation
- 1. DISCONTINUED OPERATION Presented by: Erigan, Beverly Noble, Jessa Mhariz Gordo, Khate Mea Alta, Reah Jane
- 2. Discontinued Operation is defined as a “component of an entity that either has been disposed of or is classified as held for sale” a) Represents a separate major line of business or geographical area of operations b) Part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations c) A subsidiary acquired exclusively with a view to resale It
- 3. may be subsidiary geographical segment whose operations and cash flows can be clearly distinguished operationally for financial reporting purposes • If its assets and liabilities and its revenue and expenses are directly attributable to the component
- 4. if they would be eliminated when the component is disposed of. Discontinued operation occurs when the operations and cash flows of that component have been or will be eliminated from the ongoing operations of the entity and the entity and the activity will have no significant continuing involvement in that component after its disposal.
- 5. Timing of reporting A component of an entity is classified as discontinued operation at the date: When the entity has actually disposed of the operation. b) When the operation meets the criteria to be classified as held for sale a)
- 6. Component classified as held for sale - 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.”
- 7. Example of Discontinued Operation Such as: a. Selling by a diversifies entity of a major division. b. Selling by a meat packing entity of controlling interest. c. Selling by a communication entity of all its radio station. d. Selling of commodity business, real estate, manufacturing and construction business.
- 8. Examples which are not discontinued operation a. Phasing out of a product line within a product group. b. Shifting of production or marketing activities. c. Closing of a facility, factory and branch.
- 9. Income Statement Presentation According to PFRS 5, paragraph 33: “ provide that an entity shall disclose a single amount comprising the total of post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognized as the measurement to a fair value less to cost of disposal or on the disposal of the assets.”
- 11. Disclosures about discontinued operation The following details are disclosed in the notes to financial statements: a. The amount of revenue, expenses and income or loss b. Any impartment loss c. Any gain or loss from the actual disposal of the assets and settlement of the liabilities of a discontinued operation. d. The termination cost of employees and other costs.
- 12. Presentation in Statement of Financial Position a. Assets of the components held for sale separately from all other assets. b. Assets of the components held for sale are measured at the lower of the fair value less to cost of disposal and their carrying amount. c. Liabilities of the component separately from all other liabilities. d. Nondepreciation – noncurrent assets of the components held for sale shall not be depreciated.
- 13. Cash flow presentation According to 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.”
- 14. Illustration: The accounting records of Zeta Company showed the following information for 2013: Segment A Segment B Sales 000 Cost of sales 000 Expenses Income tax 5, 000, 000 3, 000, 2, 500, 000 1, 400, 1, 000, 000 480, 000 500, 000 240, 000
- 15. Presentation ZETA COMPANY Income Statement Year ended December 31, 2013 Sales Cost of sales Gross income Expenses 000, 000) Income before tax 500, 000 Income tax expense Income from continuing operations Income from discontinued operation, net of tax 510, 000 Net Income 5, 000, 000 (2, 500,000) 2, 500, 000 (1, 1, (480,000) 1, 020, 000 1, 530, 000
- 16. Disclosure The notes to financial statements shall include the following disclosure with respect to the discontinued operation. Sales – Segment B 3, 000, 000 Cost of sales Gross income Expenses Impairment loss Employee termination cost Income tax Income from discontinued operation (1, 400, 000) 1, 600, 000 (5000, 000) (200, 000) (150, 000) (240, 000) 510, 000 Fair value less cost of disposal of Segment B Carrying amount of net assets – Segment B Impairment loss 1, 000, 000 (1, 200, 000) (200, 000)
- 17. Abandoned discontinued operation According to PFRS 5, paragraph 13 “ prohibits noncurrent assets that will be abandoned from being classified as held for sale. ” - The standard further provides that if the assets to be abandoned are a major line of the business, they are reported in discontinued operations at the date on which they are actually abandoned.