Cash flows from discontinued operations IFRS 5 – 2 Detailed Examples

 Cash flows from discontinued operations – Detailed Examples

IAS 7 requires an entity to include all of its cash flows in the statement of cash flows, including those generated from both continuing and discontinued activities.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations requires an entity to disclose its net cash flows derived from operating, investing and financing activities in respect of discontinued operations. There are two ways in which this can be achieved:

===1) Presentation in the statement of cash flows

Net cash flows from each type of activity (operating, investing and financing) derived from discontinued operations are presented separately in the statement of cash flows.

===2) Presentation in a note

Cash flows from discontinued operations are included together with cash flows from continuing operations in each line Cash flows from discontinued operationsitem in the statement of cash flows. The net cash flows relating to each type of activity (operating, investing and financing) derived from discontinued operations are then disclosed separately in a note to the financial statements.

When a disposal group that meets the definition of a discontinued operation is classified as held for sale in the current period, and has not been realised/disposed of at the entity’s reporting date, the closing balance of cash and cash equivalents presented in the statement of cash flows will not reconcile to the cash and cash equivalents balances that are included in the statement of financial position at the reporting date.

This is because the cash and cash equivalents related to the disposal group are subsumed into the assets and liabilities of the disposal group and presented within the single line item in the statement of financial position.

1. Case – Discontinued operations not disposed of at the entity’s reporting date

Basic assumptions

  • Entity A operates in the food and beverage industry sectors
  • Towards the end of the year ended 31 December 20X3, Entity A decides to dispose of the food sector
  • The planned disposal qualifies as a discontinued operation in accordance with IFRS 5, as at 31 December 20X3
  • The carrying amount of CU180 relating to Assets in disposal group classified as held for sale includes CU30 of cash and cash equivalents.

Information extracted from Entity A’s statement of financial position is as follows:

Amounts in CU

31/12/20X3

31/12/20X2

Assets

Cash and cash equivalents

Inventories

Property, Plant and Equipment

Assets in disposal group classified as held for sale¹

x

230

190

400

180

x

280

160

200

Total

1,000

640

Liabilities and equity

Trade payables

Liabilities directly associated with assets in the disposal group classified as held for sale

Share capital

Retained earnings

x

-180

x

-70

-10

-740

x

-280

x

-10

-350

Total

-1,000

-640

¹ Includes cash and cash equivalents of CU30

Additional information

Assets and liabilities directly related to the food sector disposal group as at 31 December 20X2 were as follows:

Amounts in CU

31/12/20X2

Assets

Cash

Inventories

Property, plant and equipment

x

10

50

140

Total

200

Liabilities

Trade payables

x

-120

Total

-120

  • Entity A’s profit (including profit generated from discontinued operations) in 20X3 is CU390.
  • The profit from discontinued operations in 20X3 is CU30
  • Discontinued operations in 20X3 include a cash outflow of CU100 for operating activities and a cash inflow ofCash flows from discontinued operations CU120 from investing activities
  • In 20X3, Entity A acquired property, plant and equipment for CU400. This property, plant and equipment is used in activities within continuing operations
  • Entity A presents net cash flows relating to each type of activity (operating, investing and financing) generated from discontinued operations in the statement of cash flows
  • Depreciation expense in 20X3 was CU60
  • The effects of tax have been ignored.

As at 31 December 20X3, Entity A had met the requirements in IFRS 5 meaning that the food sector disposal group was classified as a discontinued operation. As a result, the assets and liabilities of the food sector disposal group were presented separately from the other assets and liabilities of entity A in its statement of financial position.

However, the assets and liabilities of the food sector disposal group were not presented separately in the statement of financial position for the comparative period (IFRS 5.40).

In order to present a statement of cash flows for the year ended 31 December 20X3, which separates the continuing operations and the discontinued operations (either in the primary statement or in the notes), Entity A needs the opening balances of assets and liabilities of the disposal group (which comprises the discontinued operation) as at 31 December 20X2.

Entity A – Statement of Cash Flows for the year ended 31 December 20X3

Amounts in CU

31/12/20X3

Cash flows from operating activities

Profit for the period

Adjustments for income and expenses not involving cash flows:

Depreciation of property, plant and equipment (a)

Profit from discontinued operations (b)

Changes in assets and liabilities:

Increase in inventories (c)

Increase in trade payables (d)

x

390

x

60

-30

x

-80

20

Net cash generated from continuing operating activities

360

Net cash used by discontinued operations

-100

Net cash inflow from operating activities

260

Cash flows from investing activities

Acquisition of property, plant and equipment

x

-400

Net cash used in continuing investing activities

-400

Net cash generated from investing activities – discontinued operations

120

Net cash outflow from investing activities

-280

Cash flows from financing activities

Net cash generated from / (used in) financing activities

Net cash generated from / (used in) financing – discontinued operations

Net cash flow financing activities

Decrease in cash and cash equivalents in 20X3

-20

Opening cash and cash equivalents (1 January 20X3)

280

Closing cash and cash equivalents (31 December 20X3)

260

a) Depreciation of property, plant and equipment – continuing operations

CU

Opening balance as at 1 January 20X3 (excluding discontinued operations)

Add: Acquisition of property, plant and equipment

Less: Closing balance of property, plant and equipment

Depreciation

60

400

-400

60

The opening balance is calculated by deducting the amount of property, plant and equipment which relates to the discontinued operations on 31 December 20X2 (CU140) from the opening balance of entity A’s property, plant and equipment at that date (CU200).

b) Profit from discontinued operations

The profit from discontinued operations is adjusted to avoid double counting. The cash movement of 100 is obtained from the additional information above.

c) Increase in inventories – continuing operations

CU

Closing balance as at 31 December 20X3

Less: opening balance (excluding discontinued operations)

190

-110

Increase in inventories

80

The opening balance at 1 January 20X3 (excluding discontinued operations) is calculated by deducting the amount of inventories relating to the discontinued operations as at 31 December 20X2 (CU50) from the opening balance of Entity A’s inventories (CU160) at the same date.

d) Increase in trade payables – continuing operations

CU

Closing balance on 31 December 20X3

Less: opening balance (excluding discontinued operations)

180

-160

Increase in trade payables

20

The opening balance (excluding discontinued operations)is calculated by deducting the balance of trade payables which relates to the discontinued operations as at 31 December 20X2 (CU120) from the balance of total trade payables of Entity A as at the same date (CU280).

Statement of cash flows vs. Statement of financial position

Amounts in CU

Statement of cash flows

Statement of financial position

Opening balance of cash and cash equivalents

Net increase/(decrease) in cash and cash equivalents

280

-20

280

-50

Closing balance of cash and cash equivalents

260

230

The differences in the amounts for the net (decrease) in cash and cash equivalents, and in the closing balance of cash and cash equivalents, is because cash and cash equivalents of CU30 related to the food sector disposal group are included within the single line item Assets in disposal groups classified as held for sale in the statement of financial position.

2. Case – Discontinued operations disposed of in full during the reporting period

Extracts from Entity B’s statement of financial position as at 31 December 20X2 and 20X3 are as follows:

Amounts in CU

31/12/20X3

31/12/20X2

Assets

Cash and cash equivalents

Assets in disposal groups classified as held for sale

Property, plant and equipment

x

3,400

1,700

x

1,600

900

1,400

Total

5,100

3,900

Liabilities and equity

Trade payables

Liabilities directly associated with assets in disposal groups classified as held for sale

Equity

x

-550

x

-4,550

x

-240

x

-490

-3,170

Total

5,100

3,900

Additional context:

  • During 20X3, Entity B acquired property, plant and equipment (PP&E) for CU420. The PP&E is not included in the discontinued operation
  • On 30 June 20X3 Entity B paid dividends of CU140Cash flows from discontinued operations
  • On 1 August 20X3, Entity B disposed of all of the assets and liabilities of the discontinued operation for cash proceeds of CU1,300. The carrying amount of the discontinued operation’s net assets as at the disposal date was CU1,050
  • The following transactions and events took place in the discontinued operation during 20X3, prior to the date on which it was disposed of:
    • Property, plant and equipment was sold for cash proceeds of CU440
    • A loan of CU320 was repaid
    • Accounts receivable of CU480 were settled in cash.
  • As at 31 December 20X2, cash and cash equivalents were not included in non-current assets classified as held for sale
  • Entity B has adopted an accounting policy for the presentation of dividends received and dividends paid as cash flows derived from investing and financing activities, respectively (IAS 7.33)
  • The effects of tax have been ignored.

Alternative 1 – presentation of discontinued operations in the statement of cash flows

Amounts in CU

31/12/20X3

Cash flows from operating activities

Profit for the period (a)

Adjustments for income and expenses not involving cash flows:

Depreciation of property, plant and equipment (b)

Profit from discontinued operations (c)

Changes in assets and liabilities:

Increase in trade payables (d)

x

1,520

x

120

-890

x

310

Net cash generated from continuing operating activities

1,060

Net cash generated from discontinued operations (d)

480

Net cash inflows from operating activities

1,540

Cash flows from investing activities

Acquisition of property, plant and equipment

x

-420

Net cash used in continuing investing activities

-420

Net cash generated from investing activities – discontinued operations (e)

1,740

Net cash outflow from investing activities

1,320

Cash flows from financing activities

Dividend paid

x

-140

Net cash used in continuing financing activities

-140

Net cash used in financing discontinued operations (f)

-320

Net cash outflows from financing activities

-460

Increase in cash and cash equivalents in 20X3

2,400

Less: increase in cash and cash equivalents attributable to discontinued operations disposed of during the

period (g)

x

-600

Opening cash and cash equivalents (1 January 20X3)

1,600

Closing cash and cash equivalents (31 December 20X3)

3,400

a) Profit for the period

The profit for the period is equal to the change in equity before distributions. This is calculated as equity as at 31 December 20X3 of CU4,550 plus dividends paid of CU140, less the opening balance of equity of CU3,170.

b) Depreciation of property, plant and equipment (PP&E)

CU

Opening balance as at 1 January 20X3

Add: Acquisition of PP&E during 20X3

Less: Closing balance as at 31 December 20X3

1,400

420

-1,700

Depreciation of PP&E

120

c) Profit from discontinued operations

CU

Gain on disposal (i)

Add: Profit during the period up to disposal (ii)

250

640

Profit from discontinued operations

890

(i) Consideration received of CU1,300 less the closing net assets of the discontinued operations of CU1,050 (see additional information above).

(ii) Equal to the change in net assets of the discontinued operation, calculated as closing net assets of CU1,050 less opening net assets (assets of CU900 less liabilities of CU490).

d) Net cash generated from discontinued operations

In this case, it has been assumed that all operating activities had ceased by 1 January 20X3.

Consequently, the only cash flows that would be expected to be received would be the collection of trade receivables and other receivable balances. The additional information above notes that cash receipts of CU480 were received from the settlement of trade receivables.

e) Net cash generated from investing activities – discontinued operations

These are comprised of proceeds from the disposal of operations (CU1,300) plus cash received from the sale of property, plant and equipment (CU440)

f) Net cash used in financing – discontinued operations

This relates to the repayment of the loan of CU320.

g) Increase in cash and cash equivalents attributable to the discontinued operations that have been disposed of

This comprises all cash flows attributable to the discontinued operation up to the point at which it was disposed of, but does not include cash flows attributable to cash receipts from the sale of the discontinued operation.

The amount is therefore the cash inflow from the decrease in accounts receivable (CU480) plus cash proceeds from the sale of property, plant and equipment (CU440) less the cash outflow associated with the repayment of the loan (CU320).

Statement of cash flows vs. Statement of financial position

Amounts in CU

Statement of cash flows

Statement of financial position

Opening balance of cash and cash equivalents

Net increase/(decrease) in cash and cash equivalents

1,600

1,800

1,600

1,800

Closing balance of cash and cash equivalents

3,400

3,400

The amounts included in both primary statements are the same, because at the reporting period end there is no discontinued operation to be presented separately in the statement of financial position.

Alternative 2 – presentation of discontinued b) Depreciation of property, plant and equipment operations in the notes (PP&E)

Amounts in CU

31/12/20X3

Cash flows from operating activities

Profit for the period (a)

Adjustments for income and expenses not involving cash flows:

Depreciation of property, plant and equipment (b)

Profit from discontinued operations (c)

Changes in assets and liabilities:

Decrease in trade receivables

Increase in trade payables

x

1,520

x

120

-890

x

480

310

Net cash inflow from operating activities

1,540

Cash flows from investing activities

Acquisition of property, plant and equipment

Sale of property, plant and equipment

Disposal of discontinued operation, net of cash disposed of

x

-420

440

1,300

Net cash outflow from investing activities

1,320

Cash flows from financing activities

Loan repayment

Dividend paid

x

-320

-140

Net cash used in financing activities

-460

Increase in cash and cash equivalents in 20X3

2,400

Less: increase in cash and cash equivalents attributable to discontinued operations disposed of during the period (d)

x

-600

Opening cash and cash equivalents (1 January 20X3)

1,600

Closing cash and cash equivalents (31 December 20X3)

3,400

a) Profit for the period

The profit for the period is equal to the change in equity before distributions. This is calculated as equity as at 31 December 20X3 of CU4,550 plus dividends paid of CU140, less the opening balance of equity of CU3,170.

b) Depreciation of property, plant and equipment (PP&E)

Amounts in CU

31/12/20×3

Opening balance as at 1 January 20X3

Add: Acquisition of PP&E during 20X3

Less: Closing balance as at 31 December 20X3

1,400

420

-1,700

Depreciation of PP&E

120

c) Profit from discontinued operations

Amounts in CU

31/12/20X3

Gain on disposal (i)

Add: Profit during the period up to disposal (ii)

250

640

Profit from discontinued operations

890

(i) Consideration received of CU1,300 less the closing net assets of the discontinued operations of CU1,050 (see additional information above).

(ii) Equal to the change in net assets of the discontinued operation, calculated as closing net assets of CU1,050 less opening net assets (assets of CU900 less liabilities of CU490).

d) Increase in cash and cash equivalents attributable to the discontinued operations that have been

disposed of

This is comprised of all cash flow attributable to the discontinued operation up to the point at which it was disposed of, but does not include cash flows attributable to cash receipts from the sale of the discontinued operation.

The amount is therefore the cash inflow from the decrease in accounts receivable (CU480) plus cash proceeds from the sale of property, plant and equipment (CU440) less the cash outflow associated with the repayment of the loan (CU320).

Notes to the financial statements (extract)

Note [x] – Discontinued operations (extract)

The statement of cash flows includes the following amounts relating to discontinued operations:

Amounts in CU

31/12/20X3

Net cash generated by operating activities

Net cash generated by investing activities

Net cash used in financing activities

480

440

-320

Net cash flow from discontinued operations

600

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