Recording Date: September 23, 2013

CA Final Course Paper 1: Financial Reporting

Chapter 1 Unit24
CA. Aparna RamMohan

The Institute of Chartered Accountants of India

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 This lecture has been delivered by faculty members to supplement the
Study Material, Practice Manual and other content
1

The views expressed in this lecture are of the Faculty Member.

2
The content of this video lecture has not been specifically discussed
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expressed herein may not be taken to necessarily represent the views
3 of the Council or any of its committees

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This e-Lecture was Recorded on:
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 Section 1

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 To establish principles for reporting information about
discontinuing operations

To enhances the ability of financial statements users to

make accurate projections by segregating information of
continuing and discontinuing operations.

Projections would generally include enterprises cash flows, earnings generating

capacity and financial position.

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 Discontinuing operation is that component of an enterprise which is
being disposed off

Plan of disposal should be based on single coordinated plan

It could be disposed off either in single or piecemeal transactions

Should represent a separate major line of business (product or

service) or geographical area of operations

Can be distinguished operationally and for financial reporting purposes

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 Q: A Ltd has decided to sell its PVC pipes manufacturing division
and has formed a plan of signing up the sale agreement with P Ltd
on 5 Jan 20X1. The entire sale is concluded on various dates over
19 months. Will it be governed by AS 24? The Company continues
the operation of its other 11 divisions.

A: Yes, AS 24 will be applicable in this case. This discontinuing

operation will be classified under piecemeal transaction for
disposal of operations. Going concern of the entity is not affected
since the other 11 divisions will continue generating revenue for
the company.

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 Q: CFO of B Ltd argues with his companys auditor that AS 24
disclosure is not applicable on his company since the
discontinuing operations is loss making and does not affect his
other continuing business division. Is he correct?

A: AS 24 will be applicable even if the division is loss making

or not impacting other divisions, provided it forms a substantial
portion of the business, is based on single co-ordinated plan
and could be segregated operationally and financially.

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 Section 2

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 Substantial portion Terminating through
Piecemeal disposal
in its entirety abandonment

Need not
Disposal over period
In single transaction necessarily have
of months or longer
sale of assets

Spin off of
ownership of the
operation

By demerger

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 Sale of a component substantially in its entirety

The result can be a net gain or net loss.

A binding sale agreement must be entered.

The actual transfer of possession and control of the discontinuing operation may
occur at a later date.

Payments to the seller may occur at the time of the agreement, at the time of the
transfer, or over an extended future period.

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 Q: MD of C Ltd insists that AS 24 disclosure should be made in his financial
statements because his board has decided to hive off TV division, which is
a substantial division of his consumer electronics business and a binding
sale agreement has been entered with the buying party. Though payments
and transfer of control are yet to be transferred.

A: Yes, AS 24 is applicable in this situation, since there is a binding sale

agreement and a single coordinated plan supported by a board decision.
Payments and transfer of ownership could happen at later dates.

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 Disposal of the component by selling its assets and settling its liabilities in piecemeal
(individually or in small groups).

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.

No specific date at which an overall binding sale agreement is entered into.

Sale of assets and settlements of liabilities may occur over a period of months or
perhaps even longer.

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.

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 The operating assets
and liabilities of the At least a majority of its
component can be Its revenue can be operating expenses can
directly attributed to the directly attributed be directly attributed to
component / operations it
being discontinued

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 Q: CEO of D Ltd is not ready to make disclosures as per AS 24 claiming
that the sale of his D Ltds truck division is concluded on piecemeal basis, is
loss making and the total revenue of discontinuing operation is less than
10% of his total businesss revenue.

A: For AS 24 to be applicable, the sale of the operation could be in single or

piecemeal transaction, the operation or the net impact of transaction could
be profit or loss making. However, the fact that truck division might not be a
substantial portion of D Ltds business and might not impact the projections
based on the aggregate numbers, could avoid AS 24 applicability but it is
suggested to make the disclosure about the facts in notes to accounts.

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 Does every business enterprise
which close facilities, abandon
Does identifying discontinuing
products or even product lines, and
operation question the continuity or
change the size of their work force in
going concern of the entity?
response to market forces result in
discontinuing operations?
NO NO
Only if the transaction fulfills the Unless the requirements of
definition of discontinuing operation, classifying the entity as going
it will be covered under this concern is affected.
standard.
Changing the scope of an operation
or the manner in which it is
conducted is not an abandonment
because that operation, although
changed, is continuing.

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 Gradual or evolutionary phasing out of a product line or class of service

Discontinuing, even if abruptly, several products within an ongoing

business

Shifting of some production or marketing activities for a particular line

of business from one location to another

Closing of a facility to achieve productivity improvements or other cost

savings

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 Satisfy the segment definition as per AS 17

Discontinued segment could be in full or a portion of the segment

Should be a substantial portion in its entirety

Subject to a coordinated plan of action.

In a single business or geographical segment, a major product or service

line may also satisfy the criteria of the definition.

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 Q: A event management company managing events for various nature
stops managing birthday parties and focuses on large scale events. The
CEO argues that since there is no sale of operation and no profit is earned
out of abandonment of operation, it does not attract AS 24 disclosure
requirements.

A: Even abandonment and termination of business qualifies under AS 24. If

birthday parties contributed to significant portion of the event management
companys business, the plan of abandonment was based on a proper plan
and board approval then, it will be classified as discontinuing operation
under AS 24. Further, it should be operationally and financially segregated.

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 Following can be directly attributed for the discontinuing
operations:

Assets and Liabilities

Revenue and Expenses

These numbers will be eliminated from the companys

financial statements, when the component is sold,
abandoned or otherwise disposed of.

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 Should occur infrequently

Should not be common in regular course of business

Should be significant enough to impact the performance of the

enterprise for that period.

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 Q: A tile manufacturing Company introduce new types of tiles
and phases out old style tiles. Does this attract AS 24?

A: No, since it indicates change in product type and not an

operation itself. Since, the phasing out of old tiles is frequent
in nature, common in regular course of business and
individually not significant to impact the business, AS 24 is not
applicable in this case.

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 Discontinuing operations need to be disclosed if
either of the following events occur earlier:
the enterprise has entered into a binding sale agreement for
substantially all of the assets attributable to the discontinuing
operation
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

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 Who will be
Identification of the Estimated proceeds
compensated for
major assets to be or salvage to be
terminating their
disposed of; realised by disposal.
services; and

Plan should been

Location, function, announced by the
Expected method of
and approximate board of directors or
disposal;
number of employees entitys governing
body.

Period expected to
be required for Principal locations
completion of the affected;
disposal;

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 AS 24 does not establish any recognition and measurement principles.

An enterprise should apply the principles of recognition and measurement that are set out in other
Accounting Standards for the purpose of deciding as to when and how to recognise and measure the:

changes in assets and liabilities and and cash flows relating to a

the revenue, expenses, gains, losses discontinuing operation.

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 Q: An IT company making educational software
used by schools and colleges sells his software
division to another firm and moves into maintaining
the websites based on this software for schools.

A: AS 24 is applicable in this situation since sale of

a segment of the educational companys business
is based on a coordinated plan and a sale
agreement.

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 Section 3

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 The business or
Description of the geographical segment(s) in The date and nature of the
discontinuing operation(s); which it is reported as per AS initial disclosure event;
17, Segment Reporting;

The amounts of revenue and

The carrying amounts, as of
The date or period in which expenses in respect of the
the balance sheet date, of
the discontinuance is ordinary activities attributable
the total assets to be
expected to be completed if to the discontinuing operation
disposed of and the total
known or determinable; during the current financial
liabilities to be settled;
reporting period;

The amount of pre-tax profit or loss

The amounts of net cash flows
from ordinary activities attributable to
attributable to the operating, investing,
the discontinuing operation during the
and financing activities of the
current financial reporting period, and
discontinuing operation during the
the income tax expense related
current financial reporting period.
thereto;

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 The items of assets, liabilities, revenues, expenses, gains, losses, and cash
flows can be attributed to a discontinuing operation only if they will be
disposed of, settled, reduced, or eliminated when the discontinuance is
completed.

To the extent that such items continue after completion of the

discontinuance, they are not allocated to the discontinuing operation.

If an initial disclosure event occurs between the balance sheet date and the
date on which the financial statements for that period are approved by the
approving authority, disclosures as required by AS 4 are made.

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 When an enterprise disposes of assets or settles
liabilities attributable to a discontinuing operation

Enters into binding agreements for the sale of

such assets or the settlement of such liabilities

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 Q: A steel bars manufacturing company changes
his production from bars to blocks.

A: Since there is no change in the component of

the entity, just a change in product type, hence, it
doesnt get classified as discontinuing operation.

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 (a) for any gain or loss that is
recognised on the disposal of
assets or settlement of
liabilities attributable to the
discontinuing operation,
(b) the net selling price or
range of prices (which is after
deducting expected disposal
costs) of those net assets for
which the enterprise has
entered into one or more
binding sale agreements,
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(i) the amount of the pre-tax gain
or loss and
(ii) income tax expense relating to
the gain or loss; as defined in
Accounting Standard (AS) 22,
Accounting for Taxes on Income.
(i) the expected timing of receipt
of those cash flows and
(ii) the carrying amount of those
net assets on the balance sheet
date.
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An enterprise A description of any significant changes in the amount or
should include, in its
financial statements, timing of cash flows relating to the assets to be disposed or liabilities to be settled and
for periods the events causing those changes
subsequent to the
one in which the the nature and terms of binding sale agreements for the assets, a demerger or
initial disclosure spin-off by issuing equity shares of the new company to the enterprise's shareholders &
event occurs,
legal or regulatory approvals.
The disclosures For periods up to and including the period in which the discontinuance is completed.
should continue in
financial statements

A discontinuance is completed when the plan is substantially completed or abandoned,

though full payments from the buyer(s) may not yet have been received.

If an enterprise that fact,

abandons or
withdraws from a
plan that was reasons therefor and its effect should be disclosed.
previously reported
as a discontinuing
operation, Disclosure of the effect includes reversal of any prior impairment loss or provision that was
recognised with respect to the discontinuing operation.

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 The asset disposals, liability settlements, and binding sale
agreements referred to in the preceding paragraph may occur:
concurrently with the initial disclosure event, or
in the period in which the initial disclosure event occurs, or
in a later period.

If some of the assets attributable to a discontinuing operation:

have actually been sold or
are the subject of one or more binding sale agreements entered into between
the balance sheet date and the date on which the financial statements are
approved by the board of directors in case of a company or
by the corresponding approving authority in the case of any other enterprise,
the disclosures required by Accounting Standard (AS) 4, Contingencies and
Events Occurring After the Balance Sheet Date, are made.

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 Any disclosures required by this Standard should be presented separately
for each discontinuing operation.

The disclosures required on the details of the transaction should be

presented in the notes to the financial statements except the following
which should be shown on the face of the statement of profit and loss:
(a) the amount of pre-tax profit or loss from ordinary activities attributable to the
discontinuing operation during the current financial reporting period, and the income tax
expense related thereto; and
(b) the amount of the pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to the discontinuing operation.

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 Q: A readymade garment manufacturing company
stops manufacturing shirts which formed 45% of
his business along with pants 50% and other
products for balance 5%.

A: Yes, termination of shirts production would

actually bring down the businesss current revenue
by 45%, signifying a sizeable portion, hence, it will
be treated as discontinuing operations under AS 24

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 Section 4

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 ABC Company has six segments, in food and beverage industry, soft drinks, snacks, packaged ready
to eat food, packaged drinking water and ready to cook packaged food.

Due to low demand of packaged ready to eat food in India, ABC decided to dispose of the
Division with the long term strategy of re-starting that division when the market is ready for the
same .

On 12 March 20X1, the Board of Directors of ABC Company approved a detailed, formal plan
for disposal of packaged ready to eat food Division, and an announcement was made. On that
date, the carrying amount of the Division's net assets was INR 40 lakhs (assets of INR 65
lakhs minus liabilities of INR 25 lakhs).

The recoverable amount of the assets carried at INR 65 lakhs was estimated to be INR 45 lakhs and
the Company had concluded that a pre-tax impairment loss of INR 10 lakhs should be recognised. At
31 March 20Xl, the carrying amount of the Division's net assets was INR 39 lakhs (assets of INR 64
lakhs minus liabilities of INR 25 lakhs). There was no further impairment of assets between 12 March
20X1 and 31 March 20X1 when the financial statements were prepared.

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 On 30 May 20X1, the carrying amount of the net assets of the Division continued to be INR 39 lakhs. On that day, ABC
Company signed a legally binding contract to sell the ready to eat food Division.

The sale is expected to be completed by 31 December 20X1. The recoverable amount of the net assets is INR
50 lakhs. Based on that amount, an additional impairment loss of INR 10 lakhs is recognised.

In addition, the sale contract obliges ABC Company to terminate employment of certain employees of the
Division being disposed off, which would result in termination cost of INR 5 lakhs, to be paid by 31 May
20X2. A liability and related expense in this regard is also recognised.

The Company continued to operate the packaged ready to eat Division throughout 20X1.

At 31 December 20X1, the carrying amount of the packaged ready to eat Division's net assets is INR 30
lakhs, consisting of assets of INR 60 lakhs minus liabilities of INR 30 lakhs (including provision for
expected termination cost of INR 5 lakhs).

ABC Company prepares its financial statements annually as of 31 March. It does not prepare a cash flow
statement.

Other figures in the following financial statements are assumed to illustrate the presentation and disclosures required
by the Standard.

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 Snapshot Profit and Loss Account as at 31 Mar 20X1
Particulars 20X1 20X0 Amount in Lakhs

Operating Profit 170 155

Impairment Loss (10) -
Pre Tax profit from operating activities 160 155
Profit before tax 130 120
Profit from continuing operations before tax (See 85 55
Note 7 )
Income tax expense 45 25
Profit (loss) from discontinuing operations before tax 40 30
Profit (loss) from discontinuing operations before tax 45 65
(see Note 7)
Income tax expense 20 35
Profit (loss) from discontinuing operations after tax 25 30
Profit from operating activities after tax 65 60
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 Note 7 of Notes to Accounts
On 12 March 20Xl, the Board of Directors announced a plan to
dispose of Company's packaged ready to eat food Division, which
is also a separate segment as per AS 17, Segment Reporting. The
disposal is consistent with the Company's long-term strategy to
focus its activities in the areas of food and beverage manufacture
and distribution, and to divest unrelated activities.
The Company is actively seeking a buyer for the packaged ready
to eat food Division and hopes to complete the sale by the end of
20X1. At 31 March 20Xl, the carrying amount of the assets of the
packaged ready to eat food Division was Rs. 64 lakhs (previous
year Rs. 75 lakhs) and its liabilities were Rs. 25 lakhs (previous
year Rs. 20 lakhs). The following statement shows the revenue
and expenses of continuing and discontinuing operations:

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 Amount in Lakhs

Particulars 20X1 20X0 20X1 20X0 20X 20X0

1
Continuing Discontinuing Total
Operations Operations Operations
Operating Profit 105 80 65 75 170 155

Impairment Loss (10) (10) -

Pre Tax profit from operating 105 80 55 75 160 155

activities
Profit before tax 85 55 45 65 130 120

Income tax expense 45 25 20 35 65 60

Profit from operating activities after 40 30 25 30 65 60

tax

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 Snapshot Profit and Loss Account as at 31 Mar 20X2
Amount in Lakhs

Particulars 20X2 20X1

Operating Profit 180 170
Impairment Loss (10) (10)
Pre Tax profit from operating activities 170 160
Profit before tax 130 130
Profit from continuing operations before tax (See Note 7 ) 105 85

Income tax expense 50 45

Profit (loss) from discontinuing operations before tax 55 40
Profit (loss) from discontinuing operations before tax (see 25 45
Note 7)
Income tax expense 5 20
Profit (loss) from discontinuing operations after tax 20 25
Profit from operating activities after tax 75 65
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 Note 7 of Notes to Accounts
On 12 March 20Xl, the Board of Directors announced a
plan to dispose of Company's packaged ready to eat food
Division, which is also a separate segment as per AS 17,
Segment Reporting. The disposal is consistent with the
Company's long-term strategy to focus its activities in the
areas of food and beverage manufacture and distribution,
and to divest unrelated activities.
On 30 May 20X1, the carrying amount of the net assets of
the Division continued to be INR 39 lakhs.
Packaged Ready to Eat Food's assets are written down by
Rs. 10 lakhs (previous year Rs. 10 lakhs) before income
tax saving of Rs. 3 lakhs (previous year Rs. 3 lakhs) to
their recoverable amount.

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 Note 7 of Notes to Accounts (Continued):
The Company has recognised provision for termination
benefits of Rs. 5 lakhs (previous year Rs. nil) before
income tax saving of Rs. 2 lakhs (previous year Rs. nil) to
be paid by 31 May 20X2 to certain employees of the
Packaged Ready to Eat Food Division whose jobs will be
terminated as a result of the sale.
At 31 December 20X2, the carrying amount of assets of the
disposed off Division was Rs. 60 lakhs (previous year Rs.
65 lakhs) and its liabilities were Rs. 30 lakhs (previous year
Rs. 25 lakhs), including the provision for expected
termination cost of Rs. 5 lakhs (previous year Rs. nil). The
process of selling the Division has been completed by 31
December 20X2.

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 Amount in Lakhs

Particulars 20X2 20X1 20X2 20X1 20X2 20X1

Continuing Discontinuin Total

Operations g Operations Operations
Operating Profit 135 105 45 65 180 170

Impairment Loss (10) (10) (10) (10)

Pre Tax profit from operating 135 105 35 55 170 160

activities
Profit before tax 105 85 25 45 130 130

Income tax expense 50 45 5 20 55 65

Profit from operating activities after 55 40 20 25 75 65

tax

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 Understanding on Learning the
Applicability of the
Objectives of AS 24 what needs to be presentation in the
Standard
disclosed financial statements

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