• 13 Marks

CR – May 2018 – L3 – SB – Q3b – Impairment of Assets (IAS 36)

valuate discontinuation conditions and prepare profit or loss statement for Bamgbose Plc with comparative figures.

Bamgbose Plc. is a long-established travel agent, operating through a network of retail outlets and online store. In recent years, the business has seen its revenue from the online store grow strongly, and that of retail outlets decline significantly. On July 1, 2017, the board decided to close the retail network at the financial year end of December 31, 2017, and put the buildings up for sale on that date. The directors are seeking advice regarding the treatment of the buildings in the statement of financial position as well as the treatment of the trading results of the retail division for the year. The following figures are available at December 31, 2017:

  • Carrying amount of buildings: ₦30.0 million
  • Fair value less costs to sell of buildings: ₦25.8 million
  • Other expected costs of closure: ₦5.85 million

Required:

(i) Outline the conditions which must be met in order to present the results of an operation as “discontinued” and the accounting treatment that applies when such a classification is deemed appropriate. (5 Marks)

(ii) Draft the statement of profit or loss for Bamgbose Plc. for year ended December 31, 2017, together with the comparative figures for 2016, taking the above information into account. (8 Marks)

(i) The conditions which must be met in order to present the results of an operation as “discontinued” are that the discontinued operation:

  • Represents either a separate major line of business or a geographical area of operations.
  • Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations.
  • Is a subsidiary acquired exclusively with a view to resale.

Accounting Treatment

The total of:

  • The post-tax profit or loss of the discontinued operation, and
  • The post-tax gain or loss recognized on the measurement at fair value less costs to sell (or on the disposal)

should be presented as a single amount in the statement of profit or loss.

(ii) Bamgbose Plc
Statement of Profit or Loss and Other Comprehensive Income for the year ended December 31, 2017

2017 (₦m) 2016 (₦m)
Revenue 58.5 66
Cost of Sales (19.5) (30)
Gross Profit 39 36
Operating Costs W2 (20.85) (19.5)
Profit for the Year from Continuing Operations 18.15 16.5
Loss for the Year from Discontinued Operations W1 (8.7) –
Profit for the Year 9.45 16.5

Workings:

  • W1: Discontinued Operations Loss
    • The post-tax loss of the discontinued operation: ₦4.5m
    • The post-tax impairment loss recognized on the measurement of the buildings at fair value less costs to sell (₦30m – ₦25.8m): ₦4.2m
    • Total Loss for the Year from Discontinued Operations: ₦8.7m
  • W2: Operating Costs
    • As per the accounts: ₦15m
    • Other expected costs of closure: ₦5.85m
    • Total Operating Costs: ₦20.85m
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