Discontinued operation – IFRS 5 Definition: A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale and:
- Represents a separate major activity or geographical area of operations,
- Is part of a single coordinated plan to dispose of a separate major activity or geographical area of operations or
- Is a controlled entity acquired exclusively with a view to resale.
It is important to note that IFRS 5 covers two different types of operations, which are linked in some situations, but not necessarily always related:
- the classification and measurement of assets held for sale in the statement of financial position;
- the presentation of discontinued operations in the statement of comprehensive income. [IFRS 5 30 – 42]
An operation may be classified as ‘discontinued’ if the entity is either selling it or abandoning it. In the event that it is being sold, the classification as ‘held for sale’ is a precondition for the classification as a ‘discontinued operation’ when the sale has not yet taken place. Therefore, the following conditions must all be met for an operation to be classified as ‘discontinued’:
- The forthcoming sale concerns a disposal group which corresponds to a component1 of the entity (see IFRS 5 31); and
- This disposal group:
- represents a separate major line of business or geographical area of operations; or
- is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or
- is a subsidiary acquired exclusively with a view to resale.
Thus, a non-current asset which is abandoned, held for sale or sold individually can never meet the definition of a discontinued operation.
Further, it might be necessary to present an operation as discontinued in the statement of comprehensive income where no assets or liabilities of the disposal group appear separately in the statement of financial position.
This applies when the sale of a component of the entity is effective before the end of the reporting period (i.e. the assets and associated liabilities of the disposal group have been derecognised) or when the operation concerned (also corresponding to a component of the entity) has been abandoned rather than sold.
In practice, it is sometimes difficult to determine whether the proposed or actual sale (or abandonment) leads to the disposal of a component of the entity which would meet the definition of a discontinued operation set out in IFRS 5. Actually, the standard provides no criteria of size.
Whether an operation is discontinued under IFRS 5 is therefore a matter of judgement.
Presentation and disclosure
Discontinued operations are listed separately on the income statement because it’s important that investors can clearly distinguish the profits and cash flows from continuing operations from those activities that have ceased. This distinction is especially useful when companies merge, as parsing out which assets are being divested or folded gives a clearer picture of how a company will make money in the future.
Disclosure on Income Statements
When operations are discontinued, a company has multiple line items to report on its financial statements. Although the business component is being shut down, it still could generate a gain or loss in the current accounting period.
The total gain or loss from the discontinued operations is thus reported, followed by the relevant income taxes. This tax is often a future tax benefit because discontinued operations often incur losses. To determine the company’s total net income (NI), the gain or loss from discontinued operations is aggregated with that of continuing operations.
So as not to confuse adjustments to the financial statements that relate to previously reported discontinued operations, a company may classify the adjustments separately in the discontinued operations section of its financials. Adjustments may occur because of benefit plan obligations, contingent liabilities, or contingent contract terms.
If the buyer of a discontinued operation assumes the debt associated with the operation, any interest expense before the sale is allocated to discontinued operations. Generally accepted accounting principles (GAAP) do not allow general corporate overhead to be allocated to discontinued operations.
- Discontinued operations is an accounting term that refers to parts of a company’s core business or product line that have been divested or shut down.
- Discontinued operations are reported on the income statement separately from continuing operations.
- When companies merge, understanding which assets are being divested can give a clearer picture of how a company will make money in the future.
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