356362811 2016 FAC611S Chapter 19 Non Current Assets Held for Sale and Discontinued PDF

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Summary

CHAPTER 19NON-CURRENT ASSETS HELD FOR SALE andDISCONTINUED OPERATIONS1. BACKGROUNDThe objective of IFRS 5 – Non-current assets held for sale and discontinued operations is to “specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations.”The present...

Description

CHAPTER 19 NON-CURRENT ASSETS HELD FOR SALE and DISCONTINUED OPERATIONS 1.

BACKGROUND

The objective of IFRS 5 – Non-current assets held for sale and discontinued operations is to “specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations.” The presentation and disclosure of discontinued operations is dealt with in Part A. The objective underlying the disclosure of discontinued operations is that economic decisions that are taken by users of financial statements require an evaluation of the ability of the entity to generate cash and cash equivalents. By separately highlighting the results of discontinued operations, users are provided with information that is relevant in assessing the ongoing ability of the entity to generate future cash flows. Likewise, the presentation and disclosure of non-current assets and disposal groups held for sale which is covered in Part B, will also assist users in their investment decisions. Non-current assets and disposal groups are separated from other assets as their nature and use have now changed. Identifying assets (or asset groups) whose value will be mainly recovered through sale rather than through use has significant implications for cash flows. Some criticism of this standard results from the accounting treatment specified in the standard which seems more rule-based rather than principle-based. For example, paragraph 25 requires that an entity shall not depreciate (or amortise) a non-current asset while it is classified as held for sale or part of a disposal group classified as held for sale. As the classification is based on a management decision that may have not yet been fully carried out (rather than a sound principle), this could be interpreted as conceptually wrong. PART A – DISCONTINUED OPERATIONS 2.

DEFINITIONS

IFRS 5 in Appendix A defines a component of an entity as one where the operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. This is often synonymous with the level at which the operations are evaluated separately for internal reporting purposes. A component of an entity may be a cash-generating unit or any group of cash-generating units. A discontinued operation is a component of an entity that either: (a) has been disposed of, or (b) is classified as held for sale, and: • represents a separate major line of business or geographical area of operations, • is part of a single co-ordinated 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. It is important to note that not all non-current assets (or disposal groups) held for sale will necessarily arise as a result of a discontinued operation. This is because an entity can also classify a non-current

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Chapter 19: Non-current Assets Held For Sale and Discontinued Operations

asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. An entity classifies a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use (paragraph 6). For such a classification to be made: • the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable1; • for the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset or (disposal group); • an active programme to locate a buyer and complete the plan must have been initiated2; • the asset (or disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value3; • the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification (with limited exceptions); and • actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn4. 1

eg. If the seller imposes a restriction that it will continue to use, and therefore not vacate, a building which it has taken a decision to dispose of once completion of the construction of its new head office building is completed, then this indicates that the building is currently not held for sale and therefore cannot be so classified.

2

eg. If the seller has not actively marketed the asset by informing potential buyers that the asset is available for sale, then this indicates that the asset is currently not held for sale and therefore cannot be so classified.

3

eg. The seller intends to dispose of an asset, but during the year market conditions deteriorate and the asset is not sold by the end of the year. If the asset continues to be held for sale but at a price in excess of its fair value, then in the absence of a price reduction the asset is not available for immediate sale.

4

eg. The seller intends to dispose of a parcel of land and buildings but requires an environmental impact study to be conducted. It is likely that this may result in a portion of the land being withdrawn from the sale. If this happens, significant changes to the plan will have to be made and the asset cannot therefore be classified as held for sale.

Paragraph 8A clarifies that when an entity is committed to a sale plan involving loss of control of a subsidiary, the entity classifies the assets and liabilities of that subsidiary as held for sale when the above criteria are met regardless of whether the entity retains a controlling interest in its former subsidiary after the sale. Events or circumstances may extend the period to complete the sale beyond one year. An exception to the one-year requirement in the criteria above shall therefore apply in the following situations in which such events or circumstances arise (appendix B): • at the date an entity commits itself to a plan to sell a non-current asset (or disposal group), it reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset (or disposal group) that will extend the period required to complete the sale, and actions necessary to respond to those conditions cannot be initiated until after a firm purchase commitment is obtained, and a firm purchase commitment is highly probable within one year. • an entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly impose conditions on the transfer of a non-current asset (or disposal group) previously classified as held for sale that will extend the period required to complete the sale, and timely actions necessary to respond to the conditions have been taken, and a favourable resolution of the delaying tactics is expected. • during the initial one-year period, circumstances arise that were previously considered unlikely and, as a result, a non-current asset (or disposal group) previously classified as held for sale is not sold by the end of the period, and during the initial one-year period the entity took action necessary to respond to the change in circumstances, the non-current asset (or

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Chapter 19: Non-current Assets Held For Sale and Discontinued Operations

disposal group) is being actively marketed at a price that is reasonable (given the change in circumstances), and the original criteria remain met. For a non-current asset or disposal group to be classified as held for sale, the relevant criteria must be met before the reporting date. If the criteria are met after the reporting date but before the financial statements are authorized for issue, various disclosures are triggered (see below). 3.

RECOGNITION AND MEASUREMENT

The recognition and measurement of changes in assets and liabilities, and the income and expenses relating to the discontinued operation are discussed in Part B. IAS 37 Provisions, contingent liabilities and contingent assets however, makes reference to restructuring. Paragraph 70 of IAS 37 includes the sale or termination of a line of business as a restructuring. In accordance with IAS 37 Provisions, contingent liabilities and contingent assets, a provision is only recognised when: • an entity has a present obligation (legal or constructive) as a result of a past event; • it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and • a reliable estimate can be made of the amount of the obligation. A constructive obligation to restructure exists when both of the following conditions have been met: • the entity has a detailed formal plan for restructuring, identifying, at least, the business or part of the business concerned, the principal locations affected, the location, function, and approximate number of employees who will be compensated for terminating their services, the expenditures to be undertaken, and when the plan will be implemented; and • the entity has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan (for example, the discontinuance) or by announcing its main features to those affected by it. A present obligation cannot arise in respect of the discontinued operation through sale thereof until the entity has entered into a binding sale agreement. Consequently, a provision for restructuring cannot be raised until a binding sale agreement has been entered into. A restructuring provision includes those direct expenditures arising from the restructuring, that are both: • necessarily entailed in the discontinuance, and • not associated with the ongoing activities of the entity. A restructuring provision therefore does not include: • costs of retraining staff, • costs of relocating staff, • marketing costs, or • investments in new systems. 4.

PRESENTATION AND DISCLOSURE

An entity shall present and disclose information that enables users of the financial statements to evaluate the financial effects of discontinued operations and disposals of non-current assets or disposal groups. Statement of comprehensive income disclosure: An entity shall disclose: (a) a single amount on the face of the statement of comprehensive income comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on Chapter 19: Page 3

Chapter 19: Non-current Assets Held For Sale and Discontinued Operations

(b)

(c)

the disposal of the assets or disposal group(s) constituting the discontinued operation. an analysis of the single amount in (a) into: (i) the revenue, expenses and pre-tax profit of loss of discontinued operations; (ii) the related income tax expense; (iii) the gain or loss on measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; and (iv) the related income tax expense. This analysis may be presented in the notes or on the face of the statement of comprehensive income in a section identified as relating to discontinued operations. (The analysis is not required for disposal groups that are newly acquired subsidiaries that meet the criteria to be classified as held for sale on acquisition.) the net cash flows attributable to the operating, investing and financing activities of discontinued operations (presented either in the notes or on the face of the financial statements). (These disclosures are not required for disposal groups that are newly acquired subsidiaries that meet the criteria to be classified as held for sale on acquisition.)

Paragraph 33A requires an entity which presents the components of profit or loss in a separate income statement as described in paragraph 81 of IAS 1 (as revised in 2007), to present a section identified as relating to discontinued operations in that separate income statement. Comparatives must be presented for all the above disclosures so that the disclosures relate to all operations that have been discontinued by the reporting date for the latest period presented. Adjustments in the current period to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period shall be classified separately in discontinued operations, together with the nature and amount of such adjustments. If an entity ceases to classify a component of an entity as held for sale, the results of operations of the component previously presented in discontinued operations shall be reclassified and included in income from continuing operations for all periods presented. The amounts of prior periods shall be described as having been re-presented. Any gain (or loss) on the re-measurement of a non-current asset (or disposal group) classified as held for sale that does not meet the definition of a discontinued operation shall be included in profit or loss from continuing operations. Statement of financial position disclosures These are detailed in Part B.

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Chapter 19: Non-current Assets Held For Sale and Discontinued Operations

Illustrative example 19.1: Statement of comprehensive income disclosures Hope Limited received and accepted an offer from PAASI Limited to acquire its paper manufacturing division for R300 million (less costs to sell) on 30 June 20.7. The carrying amount of the net assets disposed of was R200 million. A capital profit of R20 million was realised on this sale. The corporate normal tax rate is 35% and capital gains tax has always been in effect on 50% of corporate capital gains. Set out below are extracts from the statement of comprehensive income of the paper manufacturing division:

Revenue Cost of sales Gross profit Administrative expenses Severance pay (permanent difference) Penalties for premature termination of timber supply contracts (permanent difference) Termination of agricultural lease contracts (permanent difference) Other expenses Profit before tax Income tax expense Profit after tax

20.7 R'million 801 (200) 601 (10) (12)*

20.6 R'million 2 000 (1 000) 1 000 -

( 8)* ( 2)* ( 1)* 568 (206) 362

1 000 ( 350) 650

Set out below are extracts from the statement of comprehensive income of Hope Limited (including the paper manufacturing division): 20.7 20.6 R’million R’million Revenue 100 000 90 000 Cost of sales (40 000) (30 000) Gross profit 60 000 60 000 Profit on disposal of paper division 100 Administrative expenses (19 977) (10 000) Other expenses *(i.e. 12 + 8 + 2 + 1) ( 23) Profit before taxation 40 100 50 000 Income tax expense – current (there are no temporary differences) ( 10 000) ( 20 000) Profit after tax 30 100 30 000 Required: Prepare the statement of comprehensive income and the accompanying notes of Hope Limited for the year ended 31 December 20.7 presenting the appropriate disclosures in respect of the discontinued operation.

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Chapter 19: Non-current Assets Held For Sale and Discontinued Operations

Solution: Calculation:

HOPE LIMITED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7 Continuing operations

Note

Revenue Cost of sales Gross Profit Administrative expenses Profit before tax Income tax expense Profit for the year Discontinued operations Profit from discontinued operations

2

3

Profit for the year

20.7 R’mill 99 199 39 800 59 399 (19 967) 39 432 ( 9 762) 29 670

20.6 R’mill 88 000 29 000 59 000 (10 000) 49 000 (19 650) 29 350

430

650

30 100

30 000

20.7 R’mill

20.6 R’mill

Calculation:

10 000

20 000

Given

(W1) (W1) (W1) From note 2

From note 3

HOPE LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.7 Note 2. Taxation expense South African normal tax – current Applied against profit before taxation, from: • Continuing operations • Discontinued operations • Profit on sale of discontinued operation

Tax rate reconciliation: Standard tax rate Tax on profit before tax at the standard rate - Continuing operations - Discontinued operations - Profit on disposal of discontinued operation Portion of capital profit on sale of the paper division not subject to capital gains tax Severance pay - the paper division Termination of timber contracts Termination of agricultural leases Other – specify Applied against profit before tax Effective tax rate

9 762 206 32 10 000

19 650 350 20 000

35% 14 035 13 801 199 35

35% 17 500 17 150 350 -

( 4) 4 3 1 (4 039) 10 000

2 500 20 000

24.94%

40.00%

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Tax rate recon. Balancing figure Given Note 3

50% x 35% x R20 million capital) 35%(12 given) 35%(8 given) 35%(2 given) Balancing figure Given

Chapter 19: Non-current Assets Held For Sale and Discontinued Operations

HOPE LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.7

Calculation:

Note 3. Discontinued operation As a result of an extremely good offer from PAASI Limited to acquire the paper manufacturing division on 30 June 20.7, the company signed a contract to sell its paper manufacturing division, previously reported in the manufacturing division. The discontinuance was finalised with the receipt of the proceeds during the current reporting period. 20.7 20.6 R’mill R’mill Revenue 801 2 000 Cost of sales (200) (1 000) Gross profit 601 1 000 Expenses ( 33)1 Profit before tax 568 1 000 Income tax expense (206) (350) 362 650 Profit on disposal of the paper manufacturing division

100

-

Income tax expense

(32)

-

68

-

430

650

Profit from discontinued operation

Given 35%(R100 million – R20 million) + 35% x 50% x R20 million

(Note: The above analysis could also be presented on the face of the statement of comprehensive income.)

Workings: (W1) Allocation of certain items (Note that the ‘Other expenses’ of R23m do not require allocation as they are expenses only of the discontinued operation.) Revenue Cost of sales Admin expense Tax expense 20.7 20.6 20.7 20.6 20.7 20.6 20.7 20.6 R'm R'm R'm R'm R'm R'm R'm R'm Total - given 100 000 90 000 40 000 30 000 19 977 10 000 10 000 20 000 Discontinued (238)2 operation ( 801) ( 2 000) (200) ( 1 000) (10) (350) given

99 199

88 000

39 800

29 000

1

19 967

10 000

9 762

19 650

20.7: R10 administrative salaries + R12 severance pay + R8 termination of timber supply contracts + R2 termination of agricultural leases + R1 sundry expenses. 2 R206 (given income tax expense) + R32 (R20 million x 50% x 35%) CGT + [(R100 – R20) 35%)] normal tax on profit on disposal.

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Chapter 19: Non-current Assets Held For Sale and Discontinued Operations

Additional disclosures The following disclosures shall be made in the notes in the period in which a non-current asset (or disposal group) as held for sale has either been classified as held for sale or sold: • a description of the non-current asset or disposal group; • a description of the facts and circumstances of the sale, or leading to the expected disposal, and the expected m...