Final Course Accounting Standards and Guidance Notes Unit 24 Chapter 1. CA. Aparna RamMohan

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1 Final Course Accounting Standards and Guidance Notes Unit 24 Chapter 1 CA. Aparna RamMohan 1 1

2 Section 1

3 To establish principles for reporting information about discontinuing operations To enhances the ability of financial statements users to make accurate projections by segregating information of continuing and discontinuing operations. Projections would generally include enterprise s cash flows, earnings generating capacity and financial position. 3

4 Discontinuing operation is that component of an enterprise which is being disposed off Plan of disposal should be based on single coordinated plan It could be disposed off either in single or piecemeal transactions Should represent a separate major line of business (product or service) or geographical area of operations Can be distinguished operationally and for financial reporting purposes 4

5 Q: A Ltd has decided to sell its PVC pipes manufacturing division and has formed a plan of signing up the sale agreement with P Ltd on 5 Jan 20X1. The entire sale is concluded on various dates over 19 months. Will it be governed by AS 24? The Company continues the operation of its other 11 divisions. A: Yes, AS 24 will be applicable in this case. This discontinuing operation will be classified under piecemeal transaction for disposal of operations. Going concern of the entity is not affected since the other 11 divisions will continue generating revenue for the company. 5

6 Q: CFO of B Ltd argues with his company s auditor that AS 24 disclosure is not applicable on his company since the discontinuing operations is loss making and does not affect his other continuing business division. Is he correct? A: AS 24 will be applicable even if the division is loss making or not impacting other divisions, provided it forms a substantial portion of the business, is based on single co-ordinated plan and could be segregated operationally and financially. 6

7 Section 2

8 Substantial portion in its entirety In single transaction Spin off of ownership of the operation Piecemeal disposal Disposal over period of months or longer Terminating through abandonment Need not necessarily have sale of assets By demerger 8

9 Sale of a component substantially in its entirety The result can be a net gain or net loss. A binding sale agreement must be entered. The actual transfer of possession and control of the discontinuing operation may occur at a later date. Payments to the seller may occur at the time of the agreement, at the time of the transfer, or over an extended future period. 9

10 Q: MD of C Ltd insists that AS 24 disclosure should be made in his financial statements because his board has decided to hive off TV division, which is a substantial division of his consumer electronics business and a binding sale agreement has been entered with the buying party. Though payments and transfer of control are yet to be transferred. A: Yes, AS 24 is applicable in this situation, since there is a binding sale agreement and a single coordinated plan supported by a board decision. Payments and transfer of ownership could happen at later dates. 10

11 Disposal of the component by selling its assets and settling its liabilities in piecemeal (individually or in small groups). While the overall result may be a net gain or a net loss, the sale of an individual asset or settlement of an individual liability may have the opposite effect. No specific date at which an overall binding sale agreement is entered into. Sale of assets and settlements of liabilities may occur over a period of months or perhaps even longer. Disposal of a component may be in progress at the end of a financial reporting period. To qualify as a discontinuing operation, the disposal must be pursuant to a single coordinated plan. 11

12 The operating assets and liabilities of the component can be directly attributed to the component / operations being discontinued Its revenue can be directly attributed At least a majority of its operating expenses can be directly attributed to it 12

13 Q: CEO of D Ltd is not ready to make disclosures as per AS 24 claiming that the sale of his D Ltd s truck division is concluded on piecemeal basis, is loss making and the total revenue of discontinuing operation is less than 10% of his total business s revenue. A: For AS 24 to be applicable, the sale of the operation could be in single or piecemeal transaction, the operation or the net impact of transaction could be profit or loss making. However, the fact that truck division might not be a substantial portion of D Ltd s business and might not impact the projections based on the aggregate numbers, could avoid AS 24 applicability but it is suggested to make the disclosure about the facts in notes to accounts. 13

Does every business enterprise which close facilities, abandon products or even product lines, and change

NO Only if the transaction fulfills the definition of discontinuing operation, it will be covered under this

Changing the scope of an operation or the manner in which it is conducted is not an abandonment because that

14 Does every business enterprise which close facilities, abandon products or even product lines, and change the size of their work force in response to market forces result in discontinuing operations? NO Only if the transaction fulfills the definition of discontinuing operation, it will be covered under this standard. Changing the scope of an operation or the manner in which it is conducted is not an abandonment because that operation, although changed, is continuing. Does identifying discontinuing operation question the continuity or going concern of the entity? NO Unless the requirements of classifying the entity as going concern is affected. 14

15 Gradual or evolutionary phasing out of a product line or class of service Discontinuing, even if abruptly, several products within an ongoing business Shifting of some production or marketing activities for a particular line of business from one location to another Closing of a facility to achieve productivity improvements or other cost savings 15

16 Satisfy the segment definition as per AS 17 Discontinued segment could be in full or a portion of the segment Should be a substantial portion in its entirety Subject to a coordinated plan of action. In a single business or geographical segment, a major product or service line may also satisfy the criteria of the definition. 16

17 Q: A event management company managing events for various nature stops managing birthday parties and focuses on large scale events. The CEO argues that since there is no sale of operation and no profit is earned out of abandonment of operation, it does not attract AS 24 disclosure requirements. A: Even abandonment and termination of business qualifies under AS 24. If birthday parties contributed to significant portion of the event management company s business, the plan of abandonment was based on a proper plan and board approval then, it will be classified as discontinuing operation under AS 24. Further, it should be operationally and financially segregated. 17

18 Following can be directly attributed for the discontinuing operations: Assets and Liabilities Revenue and Expenses These numbers will be eliminated from the company s financial statements, when the component is sold, abandoned or otherwise disposed of. 18

19 Should occur infrequently Should not be common in regular course of business Should be significant enough to impact the performance of the enterprise for that period. 19

20 Q: A tile manufacturing Company introduce new types of tiles and phases out old style tiles. Does this attract AS 24? A: No, since it indicates change in product type and not an operation itself. Since, the phasing out of old tiles is frequent in nature, common in regular course of business and individually not significant to impact the business, AS 24 is not applicable in this case. 20

21 Discontinuing operations need to be disclosed if either of the following events occur earlier: the enterprise has entered into a binding sale agreement for substantially all of the assets attributable to the discontinuing operation the enterprise's board of directors or similar governing body has both (i) approved a detailed, formal plan for the discontinuance and (ii) made an announcement of the plan 21

22 Identification of the major assets to be disposed of; Who will be compensated for terminating their services; and Estimated proceeds or salvage to be realised by disposal. Expected method of disposal; Location, function, and approximate number of employees Plan should been announced by the board of directors or entity s governing body. Period expected to be required for completion of the disposal; Principal locations affected; 22

23 AS 24 does not establish any recognition and measurement principles. 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. 23

24 Q: An IT company making educational software used by schools and colleges sells his software division to another firm and moves into maintaining the websites based on this software for schools. A: AS 24 is applicable in this situation since sale of a segment of the educational company s business is based on a coordinated plan and a sale agreement. 24

25 Section 3

26 Description of the discontinuing operation(s); The business or geographical segment(s) in which it is reported as per AS 17, Segment Reporting; The date and nature of the initial disclosure event; The date or period in which the discontinuance is expected to be completed if known or determinable; The carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the total liabilities to be settled; The amounts of revenue and expenses in respect of the ordinary activities attributable to the discontinuing operation during the current financial reporting period; The amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing operation during the current financial reporting period, and the income tax expense related thereto; The amounts of net cash flows attributable to the operating, investing, and financing activities of the discontinuing operation during the current financial reporting period. 26

27 The items of assets, liabilities, revenues, expenses, gains, losses, and cash flows can be attributed to a discontinuing operation only if they will be disposed of, settled, reduced, or eliminated when the discontinuance is completed. To the extent that such items continue after completion of the discontinuance, they are not allocated to the discontinuing operation. If an initial disclosure event occurs between the balance sheet date and the date on which the financial statements for that period are approved by the approving authority, disclosures as required by AS 4 are made. 27

28 When an enterprise disposes of assets or settles liabilities attributable to a discontinuing operation Enters into binding agreements for the sale of such assets or the settlement of such liabilities 28

29 Q: A steel bars manufacturing company changes his production from bars to blocks. A: Since there is no change in the component of the entity, just a change in product type, hence, it doesn t get classified as discontinuing operation. 29

30 (a) for any gain or loss that is recognised on the disposal of assets or settlement of liabilities attributable to the discontinuing operation, (b) the net selling price or range of prices (which is after deducting expected disposal costs) of those net assets for which the enterprise has entered into one or more binding sale agreements, (i) the amount of the pre-tax gain or loss and (ii) income tax expense relating to the gain or loss; as defined in Accounting Standard (AS) 22, Accounting for Taxes on Income. (i) the expected timing of receipt of those cash flows and (ii) the carrying amount of those net assets on the balance sheet date. 30

31 An enterprise should include, in its financial statements, for periods subsequent to the one in which the initial disclosure event occurs, The disclosures should continue in financial statements A description of any significant changes in the amount or timing of cash flows relating to the assets to be disposed or liabilities to be settled and the events causing those changes the nature and terms of binding sale agreements for the assets, a demerger or spin-off by issuing equity shares of the new company to the enterprise's shareholders & legal or regulatory approvals. For periods up to and including the period in which the discontinuance is completed. A discontinuance is completed when the plan is substantially completed or abandoned, though full payments from the buyer(s) may not yet have been received. If an enterprise abandons or withdraws from a plan that was previously reported as a discontinuing operation, that fact, reasons therefor and its effect should be disclosed. Disclosure of the effect includes reversal of any prior impairment loss or provision that was recognised with respect to the discontinuing operation. 31

32 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. 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 and Events Occurring After the Balance Sheet Date, are made. 32

33 Any disclosures required by this Standard should be presented separately for each discontinuing operation. The disclosures required on the details of the transaction should be presented in the notes to the financial statements except the following which should be shown on the face of the statement of profit and loss: (a) the amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing operation during the current financial reporting period, and the income tax expense related thereto; and (b) the amount of the pre-tax gain or loss recognised on the disposal of assets or settlement of liabilities attributable to the discontinuing operation. 33

34 Q: A readymade garment manufacturing company stops manufacturing shirts which formed 45% of his business along with pants 50% and other products for balance 5%. A: Yes, termination of shirts production would actually bring down the business s current revenue by 45%, signifying a sizeable portion, hence, it will be treated as discontinuing operations under AS 24 34

35 Section 4

36 ABC Company has six segments, in food and beverage industry, soft drinks, snacks, packaged ready to eat food, packaged drinking water and ready to cook packaged food. Due to low demand of packaged ready to eat food in India, ABC decided to dispose of the Division with the long term strategy of re-starting that division when the market is ready for the same. On 12 March 20X1, the Board of Directors of ABC Company approved a detailed, formal plan for disposal of packaged ready to eat food Division, and an announcement was made. On that date, the carrying amount of the Division's net assets was INR 40 lakhs (assets of INR 65 lakhs minus liabilities of INR 25 lakhs). The recoverable amount of the assets carried at INR 65 lakhs was estimated to be INR 45 lakhs and the Company had concluded that a pre-tax impairment loss of INR 10 lakhs should be recognised. At 31 March 20Xl, the carrying amount of the Division's net assets was INR 39 lakhs (assets of INR 64 lakhs minus liabilities of INR 25 lakhs). There was no further impairment of assets between 12 March 20X1 and 31 March 20X1 when the financial statements were prepared. 36

37 On 30 May 20X1, the carrying amount of the net assets of the Division continued to be INR 39 lakhs. On that day, ABC Company signed a legally binding contract to sell the ready to eat food Division. The sale is expected to be completed by 31 December 20X1. The recoverable amount of the net assets is INR 50 lakhs. Based on that amount, an additional impairment loss of INR 10 lakhs is recognised. In addition, the sale contract obliges ABC Company to terminate employment of certain employees of the Division being disposed off, which would result in termination cost of INR 5 lakhs, to be paid by 31 May 20X2. A liability and related expense in this regard is also recognised. The Company continued to operate the packaged ready to eat Division throughout 20X1. At 31 December 20X1, the carrying amount of the packaged ready to eat Division's net assets is INR 30 lakhs, consisting of assets of INR 60 lakhs minus liabilities of INR 30 lakhs (including provision for expected termination cost of INR 5 lakhs). ABC Company prepares its financial statements annually as of 31 March. It does not prepare a cash flow statement. Other figures in the following financial statements are assumed to illustrate the presentation and disclosures required by the Standard. 37

38 Snapshot Profit and Loss Account as at 31 Mar 20X1 Particulars 20X1 20X0 Operating Profit Impairment Loss (10) - Pre Tax profit from operating activities Profit before tax Profit from continuing operations before tax (See Note 7 ) Income tax expense Profit (loss) from discontinuing operations before tax Profit (loss) from discontinuing operations before tax (see Note 7) Income tax expense Profit (loss) from discontinuing operations after tax Profit from operating activities after tax Amount in Lakhs 38

39 Note 7 of Notes to Accounts On 12 March 20Xl, the Board of Directors announced a plan to dispose of Company's packaged ready to eat food Division, which is also a separate segment as per AS 17, Segment Reporting. 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. The Company is actively seeking a buyer for the packaged ready to eat food Division and hopes to complete the sale by the end of 20X1. At 31 March 20Xl, the carrying amount of the assets of the packaged ready to eat food Division was Rs. 64 lakhs (previous year Rs. 75 lakhs) and its liabilities were Rs. 25 lakhs (previous year Rs. 20 lakhs). The following statement shows the revenue and expenses of continuing and discontinuing operations: 39

40 Particulars 20X1 20X0 20X1 20X0 20X 1 Amount in Lakhs 20X0 Continuing Operations Discontinuing Operations Total Operations Operating Profit Impairment Loss (10) (10) - Pre Tax profit from operating activities Profit before tax Income tax expense Profit from operating activities after tax

41 Snapshot Profit and Loss Account as at 31 Mar 20X2 Particulars 20X2 20X1 Operating Profit Impairment Loss (10) (10) Pre Tax profit from operating activities Profit before tax Profit from continuing operations before tax (See Note 7 ) Income tax expense Profit (loss) from discontinuing operations before tax Profit (loss) from discontinuing operations before tax (see Note 7) Amount in Lakhs Income tax expense 5 20 Profit (loss) from discontinuing operations after tax Profit from operating activities after tax

42 Note 7 of Notes to Accounts On 12 March 20Xl, the Board of Directors announced a plan to dispose of Company's packaged ready to eat food Division, which is also a separate segment as per AS 17, Segment Reporting. 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 May 20X1, the carrying amount of the net assets of the Division continued to be INR 39 lakhs. Packaged Ready to Eat Food's assets are written down by Rs. 10 lakhs (previous year Rs. 10 lakhs) before income tax saving of Rs. 3 lakhs (previous year Rs. 3 lakhs) to their recoverable amount. 42

43 Note 7 of Notes to Accounts (Continued): The Company has recognised provision for termination benefits of Rs. 5 lakhs (previous year Rs. nil) before income tax saving of Rs. 2 lakhs (previous year Rs. nil) to be paid by 31 May 20X2 to certain employees of the Packaged Ready to Eat Food Division whose jobs will be terminated as a result of the sale. At 31 December 20X2, the carrying amount of assets of the disposed off Division was Rs. 60 lakhs (previous year Rs. 65 lakhs) and its liabilities were Rs. 30 lakhs (previous year Rs. 25 lakhs), including the provision for expected termination cost of Rs. 5 lakhs (previous year Rs. nil). The process of selling the Division has been completed by 31 December 20X2. 43

44 Amount in Lakhs Particulars 20X2 20X1 20X2 20X1 20X2 20X1 Continuing Operations Discontinuin g Operations Total Operations Operating Profit Impairment Loss (10) (10) (10) (10) Pre Tax profit from operating activities Profit before tax Income tax expense Profit from operating activities after tax

45 Objectives of AS 24 Applicability of the Standard Understanding on what needs to be disclosed Learning the presentation in the financial statements 45

46 46 46

SSAP 33 STATEMENT OF STANDARD ACCOUNTING PRACTICE 33 DISCONTINUING OPERATIONS

SSAP 33 STATEMENT OF STANDARD ACCOUNTING PRACTICE 33 DISCONTINUING OPERATIONS SSP 33 STTEMENT OF STNDRD OUNTING PRTIE 33 DISONTINUING OPERTIONS (Issued October 2001) The standards, which have been set in bold italic type, should be read in the context of the background material