Discontinuing Operations (As-24) | Advanced Accounting for CA Intermediate PDF Download

Need & Objective

• Objective: The purpose of the standard is to set guidelines for disclosing information regarding discontinuing operations. The main focus is on operations that the enterprise plans to stop, rather than those that have already been halted.
• Importance: If an enterprise intends to discontinue a particular segment's operation, it is crucial for the user to distinguish between information about the discontinuing operation and the ongoing operations. This separation enables users to forecast the enterprise's cash flows, earnings, and financial position accurately.

Discontinuing Operation

A discontinuing operation, as described in paragraph 3 of the standard, is a part of a business entity that:

1. Is being entirely disposed of, either by selling it off in one go, such as through a sale transaction or by transferring ownership of the part to the company's shareholders through demerger or spin-off.
2. Is being sold off in parts, like selling its assets separately and dealing with its liabilities individually.
3. Is being terminated by abandonment.
4. This operation should represent a significant line of business or a distinct geographical area of the business.
5. It must be operationally and financially distinguishable for reporting purposes.
6. From the above explanation, we understand that a discontinuing operation is a substantial part of a business, which is a crucial business line or geographical segment. This part is identifiable operationally or for financial reporting, and it is being disposed of as part of an overall plan, either entirely or in segments.
7. The discontinuation process can occur through demerger, spin-off, selling assets and settling liabilities individually, or abandonment.

For Example: XY Ltd. has three major lines of business steel, tea andelectrical appliances; it has decided to sell the steel division during thefinancial year 2002-2003. A sale agreement has been entered into on 30-11-2002 with Z Ltd. Under which steel division shall be transferred to ZLtd. on 30-03-2003. This is a case of disposing of substantially in itsentirety. However, if resolution is passed for sale of various asset and torepay the various liabilities individually of steel division, accordingly theassets like land and building, plant and machinery are sold separately andvarious liabilities like those of creditors are paid individually, it is a case of  “disposing by piecemeal”.

Termination by abandonment: An enterprise can end an operation by abandonment without a significant sale of assets. However, if the scope of operation changes, it does not constitute discontinuing the operation since the operation continues in an altered manner. The closure of a product line may not necessarily mean discontinuing the operation if the operation continues for a different product.

Abrupt or unplanned changes: Sudden changes or unplanned shifts in the product line do not equate to discontinuing the operation.

Examples provided by accounting standards may not fully meet the criteria for discontinuing an operation but could be viewed as such when combined with other circumstances, such as:

• Gradually phasing out a product line or class of service.
• Discontinuing several products within an ongoing line of business, even if done abruptly.
• Transferring some production or marketing activities for a specific line of business from one location to another.
• Closing a facility to achieve productivity improvements or cost savings.
• Selling a subsidiary whose activities resemble those of the parent or other subsidiaries - this pertains to consolidated financial statements and is essentially disposing of investments in the subsidiary or subsidiaries.

Initial Disclosure Event and Presentation

Initial Disclosure Event

Planned discontinuance details must be revealed in the first set of financial statements right after the 'initial disclosure event'.

The 'initial disclosure event' is the occurrence of either of these two events, whichever happens first:

• Entering into an agreement to sell almost all assets of the discontinuing operation.
• Approving and announcing the discontinuance plan.

Presentation & Disclosure

Initial Disclosure: The first disclosure following the initial disclosure event concerning the discontinuing operations includes:

• Description of the discontinuing operation.
• Business or geographical segments where it is reported.
• Date and nature of initial disclosure event.
• Expected timing for discontinuance completion.
• Carrying amount of total assets and liabilities to be disposed of.
• Revenue and expense amounts linked to the discontinuing operation.
• Pre-tax profit or loss and tax expense related to the discontinuing operation.
• Net cash flows from the operating, investing, and financing activities of the discontinuing operation.

Other Disclosure: When an enterprise sells assets or settles liabilities related to the discontinuing operation, the following additional details are disclosed:

• Gain or loss recognized on asset disposal or liability settlement and related income tax.
• Net selling prices of assets sold under finalized sale agreements, expected timing, and carrying amount of those assets.

Accounting Standards for Discontinuing Operations

Manner of Disclosure

• The statement of profit/loss accounts should disclose pre-tax profit or loss, tax expense, gains or losses on asset disposal, and liability settlements on its face. Additional information should be provided in the notes to accounts.

Updating the Disclosure

• Disclosure requirements for discontinued operations must be maintained in financial statements until the discontinuance process is finalized. Updates to this disclosure are necessary.

Recognition and Measurement

• Enterprises should adhere to recognition and measurement principles outlined in other accounting standards to determine when and how changes in assets, liabilities, income, expenses, and cash flows of discontinued operations are recognized and measured.

Interim Financial Reports

• Interim financial reports should include in their notes any significant post-annual report activities or events related to discontinued operations. Moreover, any notable alterations in the amount or timing of cash flows concerning assets and liabilities to be disposed of or settled should be disclosed.