ICAI Notes- Unit 6: Presentation & Disclosures Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 
 
1.119 
 
4.119 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 6: ACCOUNTING STANDARD  24 
DISCONTINUING OPERATIONS 
 
 
After studying this unit, you will be able to comprehend  the following: 
? Meaning of Discontinuing Operation;  
? Definition of Initial Disclosure Event;  
? Recognition and Measurement principles;  
? Presentation and Disclosures as required under the standard. 
6.1 INTRODUCTION 
Imagine that a large company selling several products in the market decides to 
discontinue the sale of one of its key product as it plans to sell that portion of its 
business to another entity.  
Ideally, this information should be disclosed to primary stakeholders as they would 
take economic decisions based on the performance of the remaining  portion of 
the business that is expected to be continued by the company in future. Therefore, 
the presentation requirements of such discontinuing operations becomes relevant 
and the aspects of AS 24 need to be understood. AS 24 is applicable to all 
discontinuing operations. 
The objective of AS 24 is to establish principles for reporting information about 
discontinuing operations, thereby enhancing the ability of users of financial 
statements to make projections of an enterprise's cash flows, earnings-generating 
capacity, and financial position by segregating information about discontinuing 
operations from information about continuing operations. 
6.2 DISCONTINUING OPERATION 
A discontinuing operation is a component of an enterprise:  
(a) That the enterprise, pursuant to a single plan, is: 
© The Institute of Chartered Accountants of India
Page 2


 
 
 
 
1.119 
 
4.119 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 6: ACCOUNTING STANDARD  24 
DISCONTINUING OPERATIONS 
 
 
After studying this unit, you will be able to comprehend  the following: 
? Meaning of Discontinuing Operation;  
? Definition of Initial Disclosure Event;  
? Recognition and Measurement principles;  
? Presentation and Disclosures as required under the standard. 
6.1 INTRODUCTION 
Imagine that a large company selling several products in the market decides to 
discontinue the sale of one of its key product as it plans to sell that portion of its 
business to another entity.  
Ideally, this information should be disclosed to primary stakeholders as they would 
take economic decisions based on the performance of the remaining  portion of 
the business that is expected to be continued by the company in future. Therefore, 
the presentation requirements of such discontinuing operations becomes relevant 
and the aspects of AS 24 need to be understood. AS 24 is applicable to all 
discontinuing operations. 
The objective of AS 24 is to establish principles for reporting information about 
discontinuing operations, thereby enhancing the ability of users of financial 
statements to make projections of an enterprise's cash flows, earnings-generating 
capacity, and financial position by segregating information about discontinuing 
operations from information about continuing operations. 
6.2 DISCONTINUING OPERATION 
A discontinuing operation is a component of an enterprise:  
(a) That the enterprise, pursuant to a single plan, is: 
© The Institute of Chartered Accountants of India
 
 
 
4.120 
ADVANCED ACCOUNTING 
 
(i) Disposing of substantially in its entirety, such as by selling the 
component in a single transaction or by demerger or spin-off of 
ownership of the component to the enterprise's shareholders; or 
(ii) Disposing of piecemeal, such as by selling off the component's assets 
and settling its liabilities individually; or 
(iii) Terminating through abandonment; and 
(b) That represents a separate major line of business or geographical area of 
operations. 
(c) That can be distinguished operationally and for financial reporting purposes. 
Example 1 
Co XY runs a famous chain of restaurants. It decides to sell its stake in one of the 
restaurant. This restaurant contributes around 5% of total revenue to the entire 
business. XY does not intend to sell any other restaurant as part of its strategy. 
In the above case, the sale of one restaurant out of the chain does not constitute 
disposal of business under a single plan, or a portion that represents a major line 
of business or geographical area of operations. Thus, it cannot be regarded as a 
discontinuing operation. 
Example 2 
Group MN operates in various industries including Hotels, Airlines and Software 
through its subsidiaries. It has decided to sell its Airline business to be able to 
concentrate on other verticals. As a result, it has started to sell its aircrafts and 
paying off the associated liabilities. During the year, it has sold off 5 aircrafts out 
of the fleet of 50 aircrafts so far as part of the sale. The Airline business constitutes 
25% of total group revenue. 
In the above case, Airline business may be considered as discontinuing operation. 
This is due to the fact that the assets are sold off as part of a single plan, and that 
the business represents a separate major line of business, and can be distinguished 
both operationally and for financial reporting purposes. 
 
© The Institute of Chartered Accountants of India
Page 3


 
 
 
 
1.119 
 
4.119 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 6: ACCOUNTING STANDARD  24 
DISCONTINUING OPERATIONS 
 
 
After studying this unit, you will be able to comprehend  the following: 
? Meaning of Discontinuing Operation;  
? Definition of Initial Disclosure Event;  
? Recognition and Measurement principles;  
? Presentation and Disclosures as required under the standard. 
6.1 INTRODUCTION 
Imagine that a large company selling several products in the market decides to 
discontinue the sale of one of its key product as it plans to sell that portion of its 
business to another entity.  
Ideally, this information should be disclosed to primary stakeholders as they would 
take economic decisions based on the performance of the remaining  portion of 
the business that is expected to be continued by the company in future. Therefore, 
the presentation requirements of such discontinuing operations becomes relevant 
and the aspects of AS 24 need to be understood. AS 24 is applicable to all 
discontinuing operations. 
The objective of AS 24 is to establish principles for reporting information about 
discontinuing operations, thereby enhancing the ability of users of financial 
statements to make projections of an enterprise's cash flows, earnings-generating 
capacity, and financial position by segregating information about discontinuing 
operations from information about continuing operations. 
6.2 DISCONTINUING OPERATION 
A discontinuing operation is a component of an enterprise:  
(a) That the enterprise, pursuant to a single plan, is: 
© The Institute of Chartered Accountants of India
 
 
 
4.120 
ADVANCED ACCOUNTING 
 
(i) Disposing of substantially in its entirety, such as by selling the 
component in a single transaction or by demerger or spin-off of 
ownership of the component to the enterprise's shareholders; or 
(ii) Disposing of piecemeal, such as by selling off the component's assets 
and settling its liabilities individually; or 
(iii) Terminating through abandonment; and 
(b) That represents a separate major line of business or geographical area of 
operations. 
(c) That can be distinguished operationally and for financial reporting purposes. 
Example 1 
Co XY runs a famous chain of restaurants. It decides to sell its stake in one of the 
restaurant. This restaurant contributes around 5% of total revenue to the entire 
business. XY does not intend to sell any other restaurant as part of its strategy. 
In the above case, the sale of one restaurant out of the chain does not constitute 
disposal of business under a single plan, or a portion that represents a major line 
of business or geographical area of operations. Thus, it cannot be regarded as a 
discontinuing operation. 
Example 2 
Group MN operates in various industries including Hotels, Airlines and Software 
through its subsidiaries. It has decided to sell its Airline business to be able to 
concentrate on other verticals. As a result, it has started to sell its aircrafts and 
paying off the associated liabilities. During the year, it has sold off 5 aircrafts out 
of the fleet of 50 aircrafts so far as part of the sale. The Airline business constitutes 
25% of total group revenue. 
In the above case, Airline business may be considered as discontinuing operation. 
This is due to the fact that the assets are sold off as part of a single plan, and that 
the business represents a separate major line of business, and can be distinguished 
both operationally and for financial reporting purposes. 
 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
v
v 
v
v 
    
v 
 
4.121 
 
Separate major line of business or geographical area of operations : 
? A reportable business segment or geographical segment as defined in AS 17 
‘Segment Reporting’, would normally satisfy criteria and it would represent a 
separate major line of business or geographical area of operations.  
? A part of such a segment may also satisfy criteria and it would represent a 
separate major line of business or geographical area of operations 
? For an enterprise that operates in a single business or geographical segment 
which does not report segment information, a major product or service line 
may also satisfy the criteria (see example below) 
Example 3 
Entity RT operates in a single state and is trading  in 3 products – X, Y and Z. Details  
with respect to the performance of  each of the products are as under: 
Particulars X Y Z Total 
Sales 1,00,000 14,00,000 20,00,000 35,00,000 
Cost of Goods Sold (80,000) (10,80,000) (14,40,000) (26,00,000) 
Gross Margin 20,000 3,20,000 5,60,000 9,00,000 
Operational Expenses (15,000) (1,70,000) (3,60,000) (5,45,000) 
Profit before Tax 5,000 1,50,000 2,00,000 3,55,000 
RT has decided to sell the business relating to Product Y to another entity. Since 
Product Y constitutes a major product, it may be considered as a discontinuing 
operations. 
Instead of disposing of a component substantially in its entirety, an enterprise may 
discontinue and dispose of the component by selling its assets and settling its 
liabilities piecemeal (individually or in small groups). For piecemeal disposals, 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. Moreover, there 
is no specific date at which an overall binding sale agreement is entered into. 
Rather, the sales of assets and settlements of liabilities may occur over a period of 
months or perhaps even longer. Thus, 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. 
© The Institute of Chartered Accountants of India
Page 4


 
 
 
 
1.119 
 
4.119 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 6: ACCOUNTING STANDARD  24 
DISCONTINUING OPERATIONS 
 
 
After studying this unit, you will be able to comprehend  the following: 
? Meaning of Discontinuing Operation;  
? Definition of Initial Disclosure Event;  
? Recognition and Measurement principles;  
? Presentation and Disclosures as required under the standard. 
6.1 INTRODUCTION 
Imagine that a large company selling several products in the market decides to 
discontinue the sale of one of its key product as it plans to sell that portion of its 
business to another entity.  
Ideally, this information should be disclosed to primary stakeholders as they would 
take economic decisions based on the performance of the remaining  portion of 
the business that is expected to be continued by the company in future. Therefore, 
the presentation requirements of such discontinuing operations becomes relevant 
and the aspects of AS 24 need to be understood. AS 24 is applicable to all 
discontinuing operations. 
The objective of AS 24 is to establish principles for reporting information about 
discontinuing operations, thereby enhancing the ability of users of financial 
statements to make projections of an enterprise's cash flows, earnings-generating 
capacity, and financial position by segregating information about discontinuing 
operations from information about continuing operations. 
6.2 DISCONTINUING OPERATION 
A discontinuing operation is a component of an enterprise:  
(a) That the enterprise, pursuant to a single plan, is: 
© The Institute of Chartered Accountants of India
 
 
 
4.120 
ADVANCED ACCOUNTING 
 
(i) Disposing of substantially in its entirety, such as by selling the 
component in a single transaction or by demerger or spin-off of 
ownership of the component to the enterprise's shareholders; or 
(ii) Disposing of piecemeal, such as by selling off the component's assets 
and settling its liabilities individually; or 
(iii) Terminating through abandonment; and 
(b) That represents a separate major line of business or geographical area of 
operations. 
(c) That can be distinguished operationally and for financial reporting purposes. 
Example 1 
Co XY runs a famous chain of restaurants. It decides to sell its stake in one of the 
restaurant. This restaurant contributes around 5% of total revenue to the entire 
business. XY does not intend to sell any other restaurant as part of its strategy. 
In the above case, the sale of one restaurant out of the chain does not constitute 
disposal of business under a single plan, or a portion that represents a major line 
of business or geographical area of operations. Thus, it cannot be regarded as a 
discontinuing operation. 
Example 2 
Group MN operates in various industries including Hotels, Airlines and Software 
through its subsidiaries. It has decided to sell its Airline business to be able to 
concentrate on other verticals. As a result, it has started to sell its aircrafts and 
paying off the associated liabilities. During the year, it has sold off 5 aircrafts out 
of the fleet of 50 aircrafts so far as part of the sale. The Airline business constitutes 
25% of total group revenue. 
In the above case, Airline business may be considered as discontinuing operation. 
This is due to the fact that the assets are sold off as part of a single plan, and that 
the business represents a separate major line of business, and can be distinguished 
both operationally and for financial reporting purposes. 
 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
v
v 
v
v 
    
v 
 
4.121 
 
Separate major line of business or geographical area of operations : 
? A reportable business segment or geographical segment as defined in AS 17 
‘Segment Reporting’, would normally satisfy criteria and it would represent a 
separate major line of business or geographical area of operations.  
? A part of such a segment may also satisfy criteria and it would represent a 
separate major line of business or geographical area of operations 
? For an enterprise that operates in a single business or geographical segment 
which does not report segment information, a major product or service line 
may also satisfy the criteria (see example below) 
Example 3 
Entity RT operates in a single state and is trading  in 3 products – X, Y and Z. Details  
with respect to the performance of  each of the products are as under: 
Particulars X Y Z Total 
Sales 1,00,000 14,00,000 20,00,000 35,00,000 
Cost of Goods Sold (80,000) (10,80,000) (14,40,000) (26,00,000) 
Gross Margin 20,000 3,20,000 5,60,000 9,00,000 
Operational Expenses (15,000) (1,70,000) (3,60,000) (5,45,000) 
Profit before Tax 5,000 1,50,000 2,00,000 3,55,000 
RT has decided to sell the business relating to Product Y to another entity. Since 
Product Y constitutes a major product, it may be considered as a discontinuing 
operations. 
Instead of disposing of a component substantially in its entirety, an enterprise may 
discontinue and dispose of the component by selling its assets and settling its 
liabilities piecemeal (individually or in small groups). For piecemeal disposals, 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. Moreover, there 
is no specific date at which an overall binding sale agreement is entered into. 
Rather, the sales of assets and settlements of liabilities may occur over a period of 
months or perhaps even longer. Thus, 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. 
© The Institute of Chartered Accountants of India
 
 
 
4.122 
ADVANCED ACCOUNTING 
 
An enterprise may terminate an operation by abandonment without substantial 
sales of assets. An abandoned operation would be a discontinuing operation if it 
satisfies the criteria in the definition. However, changing the scope of an operation 
or the manner in which it is conducted is not abandonment because that operation, 
although changed, is continuing. 
Example 4 
GH, a large car manufacturing company, decides to discontinue its manufacturing 
operations relating to the diesel cars production. It plans to restructure the business 
by revamping  its existing operations, and starting  new manufacturing process for 
manufacture and  sale of electric vehicles. 
In the above example, it needs to be  evaluated whether the restructuring is a result 
of continuing operations, or termination of existing operations, and accordingly it 
can be concluded  whether it is  a case of discontinuing operations or not. 
Examples of activities that do not necessarily satisfy criterion (a) of the definition, 
but that might do so in combination with other circumstances, include:  
(a) Gradual or evolutionary phasing out of a product line or class of service; 
(b) Discontinuing, even if relatively abruptly, several products within an ongoing 
line of business; 
(c) Shifting of some production or marketing activities for a particular line of 
business from one location to another; and 
(d) Closing of a facility to achieve productivity improvements or other cost 
savings.  
An example in relation to consolidated financial statements is selling a subsidiary 
whose activities are similar to those of the parent or other subsidiaries. 
A component can be distinguished operationally and for financial reporting 
purposes - criterion (c) of the definition of a discontinuing operation - if all the 
following conditions are met:  
(a) The operating assets and liabilities of the component can be directly 
attributed to it. 
(b) Its revenue can be directly attributed to it. 
© The Institute of Chartered Accountants of India
Page 5


 
 
 
 
1.119 
 
4.119 
ADVANCED ACCOUNTING 
 
 
 
LEARNING OUTCOMES 
UNIT 6: ACCOUNTING STANDARD  24 
DISCONTINUING OPERATIONS 
 
 
After studying this unit, you will be able to comprehend  the following: 
? Meaning of Discontinuing Operation;  
? Definition of Initial Disclosure Event;  
? Recognition and Measurement principles;  
? Presentation and Disclosures as required under the standard. 
6.1 INTRODUCTION 
Imagine that a large company selling several products in the market decides to 
discontinue the sale of one of its key product as it plans to sell that portion of its 
business to another entity.  
Ideally, this information should be disclosed to primary stakeholders as they would 
take economic decisions based on the performance of the remaining  portion of 
the business that is expected to be continued by the company in future. Therefore, 
the presentation requirements of such discontinuing operations becomes relevant 
and the aspects of AS 24 need to be understood. AS 24 is applicable to all 
discontinuing operations. 
The objective of AS 24 is to establish principles for reporting information about 
discontinuing operations, thereby enhancing the ability of users of financial 
statements to make projections of an enterprise's cash flows, earnings-generating 
capacity, and financial position by segregating information about discontinuing 
operations from information about continuing operations. 
6.2 DISCONTINUING OPERATION 
A discontinuing operation is a component of an enterprise:  
(a) That the enterprise, pursuant to a single plan, is: 
© The Institute of Chartered Accountants of India
 
 
 
4.120 
ADVANCED ACCOUNTING 
 
(i) Disposing of substantially in its entirety, such as by selling the 
component in a single transaction or by demerger or spin-off of 
ownership of the component to the enterprise's shareholders; or 
(ii) Disposing of piecemeal, such as by selling off the component's assets 
and settling its liabilities individually; or 
(iii) Terminating through abandonment; and 
(b) That represents a separate major line of business or geographical area of 
operations. 
(c) That can be distinguished operationally and for financial reporting purposes. 
Example 1 
Co XY runs a famous chain of restaurants. It decides to sell its stake in one of the 
restaurant. This restaurant contributes around 5% of total revenue to the entire 
business. XY does not intend to sell any other restaurant as part of its strategy. 
In the above case, the sale of one restaurant out of the chain does not constitute 
disposal of business under a single plan, or a portion that represents a major line 
of business or geographical area of operations. Thus, it cannot be regarded as a 
discontinuing operation. 
Example 2 
Group MN operates in various industries including Hotels, Airlines and Software 
through its subsidiaries. It has decided to sell its Airline business to be able to 
concentrate on other verticals. As a result, it has started to sell its aircrafts and 
paying off the associated liabilities. During the year, it has sold off 5 aircrafts out 
of the fleet of 50 aircrafts so far as part of the sale. The Airline business constitutes 
25% of total group revenue. 
In the above case, Airline business may be considered as discontinuing operation. 
This is due to the fact that the assets are sold off as part of a single plan, and that 
the business represents a separate major line of business, and can be distinguished 
both operationally and for financial reporting purposes. 
 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
v
v 
v
v 
    
v 
 
4.121 
 
Separate major line of business or geographical area of operations : 
? A reportable business segment or geographical segment as defined in AS 17 
‘Segment Reporting’, would normally satisfy criteria and it would represent a 
separate major line of business or geographical area of operations.  
? A part of such a segment may also satisfy criteria and it would represent a 
separate major line of business or geographical area of operations 
? For an enterprise that operates in a single business or geographical segment 
which does not report segment information, a major product or service line 
may also satisfy the criteria (see example below) 
Example 3 
Entity RT operates in a single state and is trading  in 3 products – X, Y and Z. Details  
with respect to the performance of  each of the products are as under: 
Particulars X Y Z Total 
Sales 1,00,000 14,00,000 20,00,000 35,00,000 
Cost of Goods Sold (80,000) (10,80,000) (14,40,000) (26,00,000) 
Gross Margin 20,000 3,20,000 5,60,000 9,00,000 
Operational Expenses (15,000) (1,70,000) (3,60,000) (5,45,000) 
Profit before Tax 5,000 1,50,000 2,00,000 3,55,000 
RT has decided to sell the business relating to Product Y to another entity. Since 
Product Y constitutes a major product, it may be considered as a discontinuing 
operations. 
Instead of disposing of a component substantially in its entirety, an enterprise may 
discontinue and dispose of the component by selling its assets and settling its 
liabilities piecemeal (individually or in small groups). For piecemeal disposals, 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. Moreover, there 
is no specific date at which an overall binding sale agreement is entered into. 
Rather, the sales of assets and settlements of liabilities may occur over a period of 
months or perhaps even longer. Thus, 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. 
© The Institute of Chartered Accountants of India
 
 
 
4.122 
ADVANCED ACCOUNTING 
 
An enterprise may terminate an operation by abandonment without substantial 
sales of assets. An abandoned operation would be a discontinuing operation if it 
satisfies the criteria in the definition. However, changing the scope of an operation 
or the manner in which it is conducted is not abandonment because that operation, 
although changed, is continuing. 
Example 4 
GH, a large car manufacturing company, decides to discontinue its manufacturing 
operations relating to the diesel cars production. It plans to restructure the business 
by revamping  its existing operations, and starting  new manufacturing process for 
manufacture and  sale of electric vehicles. 
In the above example, it needs to be  evaluated whether the restructuring is a result 
of continuing operations, or termination of existing operations, and accordingly it 
can be concluded  whether it is  a case of discontinuing operations or not. 
Examples of activities that do not necessarily satisfy criterion (a) of the definition, 
but that might do so in combination with other circumstances, include:  
(a) Gradual or evolutionary phasing out of a product line or class of service; 
(b) Discontinuing, even if relatively abruptly, several products within an ongoing 
line of business; 
(c) Shifting of some production or marketing activities for a particular line of 
business from one location to another; and 
(d) Closing of a facility to achieve productivity improvements or other cost 
savings.  
An example in relation to consolidated financial statements is selling a subsidiary 
whose activities are similar to those of the parent or other subsidiaries. 
A component can be distinguished operationally and for financial reporting 
purposes - criterion (c) of the definition of a discontinuing operation - if all the 
following conditions are met:  
(a) The operating assets and liabilities of the component can be directly 
attributed to it. 
(b) Its revenue can be directly attributed to it. 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
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4.123 
 
(c) At least a majority of its operating expenses can be directly attributed to it. 
Assets, liabilities, revenue, and expenses are directly attributable to a component if 
they would be eliminated when the component is sold, abandoned or otherwise 
disposed of. If debt is attributable to a component, the related interest and other 
financing costs are similarly attributed to it.  
Discontinuing operations are infrequent events, but this does not mean that all 
infrequent events are discontinuing operations. 
The fact that a disposal of a component of an enterprise is classified as a 
discontinuing operation under AS 24 does not, in itself, bring into question the 
enterprise's ability to continue as a going concern. 
6.3  INITIAL DISCLOSURE EVENT 
With respect to a discontinuing operation, the initial disclosure event is the 
occurrence of one of the following, whichever occurs earlier:  
(a) The enterprise has entered into a binding sale agreement for substantially all 
of the assets attributable to the discontinuing operation; or 
(b) 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. 
A detailed, formal plan for the discontinuance normally includes: 
? identification of the major assets to be disposed of; 
? the expected method of disposal; 
? the period expected to be required for completion of the disposal; 
? the principal locations affected; 
? the location, function, and approximate number or employees who will be 
compensated for terminating their services; and  
? the estimated proceeds or salvage to be realised by disposal. 
An enterprise’s board of directors or similar governing body is considered to have 
made the announcement of a detailed, formal plan for discontinuance, if it has 
© The Institute of Chartered Accountants of India