- 10 Marks
FR – L2 – Q38 – Financial Reporting Standards and Their Applications
Define non-current assets held for sale and discontinued operations, and explain the usefulness of discontinued operations information.
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.
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