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FRS objective is to required all entities falling within its scope to highlights a range of important components of financial performance to aid users in understanding the performance achieved by entity in the period and assist them in the forming a basis for their assessment of future results and cash flows. FRS 3 is concerned with the income statement, Paragraph 4 of FRS 3 defines a discontinued operation as one that is sold or terminated, and:
the sale or termination is completed before the earlier of three months after the year end or the date on which the financial statements are approved
for a termination, the activities have ceased permanently
the sale or termination has a material effect on the nature and focus of the entity's operations and represents a material reduction in its operating facilities, either from withdrawal from a particular market (class or business or geographical) or from a material reduction in the turnover in the company's continuing markets
the assets, liabilities, results of operations and activities are clearly distinguishable - physically, operationally, and for financial reporting purposes.
All the conditions (a) to (d) have to be satisfied, otherwise it is a continuing operation. Paragraph 14 of FRS 3 states that acquisitions, continuing operations, and discontinued operations should be shown separately in the income statement. The minimum disclosure of discontinued operations should be of turnover and operating profit on the face of the income statement, and the items between turnover and operating profit should be shown either on the face of the income statement or in the notes. Where interest or tax has been divided between continuing and discontinued operations, the method and underlying assumptions should be disclosed.
Paragraph 17 states that reorganization or restructuring of continuing operations resulting from a sale or termination should be included in continuing operations. In paragraph 18, a sale is defined as a binding sale agreement, and a termination is a detailed formal plan from which the entity cannot realistically withdraw. Any provision should include only:
the direct costs of the sale or termination
any operating losses up to the date of the sale or termination.
The losses (a) and (b) of the discontinued operation should be shown separately on the face of the income statement. If the sale or termination does not qualify as a discontinued operation, then it should be included in continuing operations.
IAS 35 Discontinuing Operations
IAS 35, Discontinuing Operations was issued in 1998. It replaced and expanded upon paragraphs 19 to 22 of IAS 8, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies. The requirements are very similar to the UK FRS 3, but more detailed. The standard says it applies to discontinuing a major operation of an enterprise. It defines a major operation as a 'large component of an enterprise - a business or geographical segment'. It then goes into more detail about what constitutes a major operation. It says that 'different stages of vertically integrated operations may be identified as separate business segments'. Also, disposal of part of a business segment may be a major operation. A major operation is expected to occur relatively infrequently, so many restructurings would not qualify as a disposal of a major operation. The initial disclosure of the event is the occurrence of the earlier of:
the enterprise entering into a binding sale agreement for substantially all of the assets attributable to the discontinuing operation
the board of directors both approving a detailed formal plan for the discontinuance, and making an announcement of the plan.
Like FRS 3, IAS 35 requires a discontinuing operation to be included in the financial statements if the decision to discontinue is made between the balance sheet date and the date the financial statements are approved (unlike FRS 3, there is no three-month rule). In IAS 35 there is no requirement that the discontinuance or disposal should have been completed by the time the financial statements are approved.
Also, there is no specification of the time within which the discontinuance should take place (FRED 32/ED 4 places a normal time limit of 12 months after the year end). On disclosure of discontinuing operations, IAS 35 requires:
a description of the discontinuing operation and its business or geographical segment
the date of the initial disclosure and the date discontinuance is expected to be completed
the pre-tax gain or loss recognized on disposals of assets or settlement of liabilities attributable to the discontinuing operation should be shown on the face of the income statement, all other disclosures may be included in the notes to the financial statements
for the balance sheet, it requires disclosure of the 'carrying amounts at the balance sheet date of the total assets and total liabilities to be disposed of'
disclosure of 'the amounts of net cash flows attributable to the operating, investing, and financing activities of the discontinuing operation during the current financial period'.
Disposal of Non-Current Assets and Presentation of Discontinued Operations
There are a few minor additions and deletions, and changes from international accounting standards ,To include disposal of non-current assets.
The presentation includes the balance sheet (which is not included in FRS 3).
There is more detailed explanation of how assets held for sale should be valued.
For international standards, it will include fewer discontinuing operations than IAS 35, as:
IAS 35 requires the discontinuing operation to be included if it is authorized in the period between the balance sheet date and the date the financial statements are approved. With ED 4, the discontinuing operation will only be included if the decision has been made before the year end.
IAS 35 specifies no time limit within which discontinuance should be completed, whereas ED 4 suggests the period should not exceed 12 months after the balance sheet date.
FRED 32/ED 4 starts by saying its objective is to improve information in financial statements about assets and disposal groups that are to be disposed of, and continuing operations. It seeks to do this by specifying:
the measurement, presentation and disclosure of non-current assets and disposal groups to be disposed of
the presentation of discontinued operations (paragraph 1).
In paragraph 2 it states that it does not apply to the following non-current assets:
deferred tax assets
financial assets within the scope of IAS 39, Financial Instruments: Recognition and Measurement
assets arising from employee benefits
financial assets arising under leases.
Then, in paragraph 8 it makes the important point that non-current assets should be valued at the lower of carrying value and the fair value less costs to sell.
In paragraph 16, it says that depreciation should not be charged while a non-current asset is held for sale. The ASB believe that fixed assets which are continuing to be used should be depreciated, and depreciation should not be suspended on assets which are continuing to be used, simply because they have been labelled as 'held for sale within one year' (FRS 15, Tangible Fixed Assets concurs with the ASB's view
Disclosure in the income statement
Paragraph 24 states that revenues, expenses, pre-tax profit or loss, and income tax expense of discontinued operations should be shown separately on the face of the income statement. The following should be shown either on the face of the income statement or in the notes:
the gain or loss on re-measurement to fair value less costs to sell, or disposal of the assets or disposal group, and the income tax expense of the discontinued operation
the net cash flows attributable to the operating, investing and financing activities of the discontinued operation
adjustments in the current period to amounts previously presented as discontinued operations.
Disclosure in the balance sheet
In the balance sheet, there should be separate presentation of non-current assets and assets of a disposal group as held for sale (this includes liabilities).
The notes to the balance sheet should give a description of the facts and circumstances leading to the disposal and the expected manner and timing of the disposal, and the segment in which the non-current asset or disposal group is presented (if applicable).
Example of Disclosure the Discontinue operation from the P&G company in 2009:
In November.2008, the Company completed the divestiture of our Coffee business through the merger of its Folgers coffee subsidiary into.The J.M. Smucker Company (Smucker) in an all-stock reverse MorrisTrust transaction. In connection with the merger, 38.7.million shares of common stock of the Company were tendered by shareholders and
exchanged for all shares of Folgers common stock, resulting in an increase of treasury stock of
$2,466. Pursuant to the merger, a Smucker subsidiary merged with and into Folgers and Folgers became a wholly owned subsidiary of Smucker. The Company recorded an after-tax
gain on the transaction of $2,011, which is included in Net Earnings from Discontinued Operations in the Consolidated Statement of Earnings for the year ended June.30,.2009.
The Coffee business had historically been part of the Company's Snacks,Coffee and Pet Care reportable segment, as well as the coffee portion of our away-from-home business which is included in the Fabric Care and Home Care reportable segment. In accordance with the applicable accounting guidance for the impairment or disposal of long-lived
assets, the results of Folgers are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all years presented. Following is selected financial information included in Net Earnings from Discontinued Operations for the Coffee business:
Reporting of Discontinued Activities
The profit and loss account must show separately the performance of the discontinued activities separately from those of continuing activities to ensure that the financial information being disclosed is both relevant to the needs of users and reliable. To also ensure comparability of financial information the prior year accounts must also be re-drafted or restated to include the results of the discontinued operation separately.
IFRS 5 allows the business to report discontinued operations in the profit and loss account using one of the following alternatives:
The business can elect to disclose only the profit or loss made by the discontinued business in the profit and loss account. The business should then make a full disclosure of the discontinued events in the notes to the accounts. The note to the accounts should disclose the detailed financial results of the discontinued activity or the sold part of the business.
The business can also elect to disclose on the face of its accounts the profit or loss made by the discontinued operations. The profit and loss will disclose in detail the breakdown of the revenues, operating costs, interest costs, and the taxation relating to the discontinued operations.
Why should Discontinued Operations be Disclosed Separately?
The performance of discontinued operations is disclosed separately from the performance of continuing events to allow the users of accounting information to:
Appreciate the financial effects of the closure or sale of the discontinued operation. If the performance of the discontinued operation is disclosed separately users of accounting information will be able to understand the amount of business that has been lost, the part that will no longer be part of the business in future. They will be able to understand what both the future revenue streams and cost structures of the remaining business will be in future.
Appreciate the underlying performance of the remaining business. Users will be able to ascertain the likely future returns that the new or remaining business will generate in future. Users will be able to glean from the size of this retrenchment the size of the business lost, therefore they will be able to forecast and make more informed judgments of the remaining business.