- 10 Marks
FR – L2 – Q38 – Financial Reporting Standards and Their Applications
Question
(a) State the definition of both non-current assets held for sale and discontinued operations and explain the usefulness of information for discontinued operations.
Adenta Holdings is in the process of preparing its financial statements for the year ended 31 October 20X4. The company’s main activity is in the travel industry mainly selling package holidays (flights and accommodation) to the general public through the Internet and retail travel agencies. During the current year the number of holidays sold by travel agencies declined dramatically and the directors decided at a board meeting on 15 October 20X4 to cease marketing holidays through its chain of travel agents and sell off the related high-street premises. Immediately after the meeting the travel agencies’ staff and suppliers were notified of the situation and an announcement was made in the press. The directors wish to show the travel agencies’ results as a discontinued operation in the financial statements to 31 October 20X4. Due to the declining business of the travel agents, on 1 August 20X4 (three months before the year-end) Adenta Holdings expanded its Internet operations to offer car hire facilities to purchasers of its Internet holidays.
The following are Adenta Holdings’s summarised statement of profit or loss results – years ended 31 October:
| 20X4 Total | 20X4 Travel Agencies | 20X3 Total | 20X3 Travel Agencies | |
|---|---|---|---|---|
| Revenue | 39,000 | 14,000 | 40,000 | 18,000 |
| Cost of sales | (36,000) | (16,500) | (32,000) | (15,000) |
| Gross profit/(loss) | 3,000 | (2,500) | 8,000 | 3,000 |
| Operating expenses | (2,600) | (1,500) | (2,000) | (1,500) |
| Profit/(loss) for period | 400 | (4,000) | 6,000 | 1,500 |
Required:
(b) Discuss whether the directors’ wish to show the travel agencies’ results as a discontinued operation is justifiable.
(c) Assuming the closure of the travel agencies is a discontinued operation, prepare the (summarised) statement of profit or loss of Adenta Holdings for the year ended 31 October 20X4 together with its comparatives.
Answer
(a). IFRS 5 Non-current assets held for sale and discontinued operations defines non-current assets held for sale as those assets (or a group of assets) whose carrying amounts will be recovered principally through a sale transaction rather than through continuing use. A discontinued operation is a component of an entity that has either been disposed of, or is classified as ‘held for sale’ and:
(i) represents a separate major line of business or geographical area of operations
(ii) is part of a single co-ordinated plan to dispose of such, or
(iii) is a subsidiary acquired exclusively for sale.
IFRS 5 says that a ‘component of an entity’ must have operations and cash flows that can be clearly distinguished from the rest of the entity and will in all probability have been a cash-generating unit (or group of such units) whilst held for use. This definition also means that a discontinued operation will also fall to be treated as a ‘disposal group’ as defined in IFRS 5. A disposal group is a group of assets (possibly with associated liabilities) that it is intended will be disposed of in a single transaction by sale or otherwise (closure or abandonment). Assets held for disposal (but not those being abandoned) must be presented separately (at the lower of cost or fair value less costs to sell) from other assets and included as current assets (rather than as non-current assets) and any associated liabilities must be separately presented under liabilities. The results of a discontinued operation should be disclosed separately as a single figure (as a minimum).
(b) The directors’ wish to show the travel agencies’ results as a discontinued operation is justifiable under IFRS 5. The decision to cease marketing holidays through the chain of travel agents and sell the related high-street premises was made on 15 October 20X4, with immediate notification to staff, suppliers, and the press. This indicates that the travel agencies represent a separate major line of business, as they are distinct from the company’s Internet-based operations. The closure and planned sale of premises meet the IFRS 5 criteria for classification as ‘held for sale’, as the decision is part of a single coordinated plan to dispose of a major line of business. The travel agencies’ operations and cash flows can be clearly distinguished from the rest of Gbewaa Ventures, satisfying the definition of a component of an entity. Therefore, classifying the travel agencies as a discontinued operation is appropriate, as it aligns with IFRS 5 requirements for separate presentation of results from disposed or held-for-sale components.
(c)
Gbewaa Ventures statement of profit or loss year-ended 31 October:
| 20X4 | 20X3 | |
|---|---|---|
| GH₵’000 | GH₵’000 | |
| Continuing operations | ||
| Revenue | 25,000 | 22,000 |
| Cost of sales | (19,500) | (17,000) |
| Gross profit | 5,500 | 5,000 |
| Operating expenses | (1,100) | (500) |
| Profit/(loss) from continuing operations | 4,400 | 4,500 |
| Discontinued operations | ||
| Profit/(loss) from discontinued operations | (4,000) | 1,500 |
| Profit for the period | 400 | 6,000 |
| Analysis of discontinued operations | ||
| Revenue | 14,000 | 18,000 |
| Cost of sales | (16,500) | (15,000) |
| Gross profit/(loss) | (2,500) | 3,000 |
| Operating expenses | (1,500) | (1,500) |
| Profit/(loss) from discontinued operations | (4,000) | 1,500 |
Note: other presentations may be acceptable.
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