DISCONTINUED

OPERATION
CHAPTER 9
DISCONTINUED OPERATION
Under Appendix A of PFRS 5, a discontinued operation is
defined as a component of an entity that either has been
disposed of or is classified as held for sale and:
a. Represents a separate major line of business or
geographical area of operations.
b. Is part of a ingle co-ordinated plan to dispose of a separate
major line of business or geographical area of operations.
c. Is a subsidiary acquired exclusively with a view to resale.
Component classified as held
for sale
• The discontinued operation is accounted for as a
“disposal group classified as held for sale.”

• The component of an entity must be available for

immediate sale in the present condition and the sale
must be highly probable.
Timing of reporting

A component of an entity is classified as discontinued

operation at the date:

a. When the entity has actually disposed of the operation.

b. When the operation meets the criteria to be classified
as held for sale.
 PFRS 5, paragraph 12, prohibits the retroactive
classification as a discontinued operation when the
discontinued criteria are met after the end of reporting
period.
Stated otherwise, if the discontinued criteria are met after
the end of the reporting period, an entity shall not classify
the discontinued operation as held for sale in the current
financial statements
Component of an entity
A component of an entity may be a subsidiary, a major
line of business or geographical segment whose operations
and cash flows can be clearly distinguished, operationally
and for financial reporting purposes, from the rest of the
entity.

The component can be clearly distinguished operationally

and for financial reporting purposes if the assets and
liabilities and the revenue and expenses are directly
attributable to the component.
Assets, liabilities, income and expenses are directly attributable to the
component if they would be eliminated when the component is
disposed of.

Accordingly, a discontinued operation occurs when the operations and

cash flows of that component have been or will be eliminated from the
ongoing operations of the entity will have no significant continuing
involvement in that component after disposal.
Examples of discontinued
operation
a. Selling by a diversified entity of major division that represents the
entity’s only activities I the electronics industry.
b. Selling by a meat packing entity of controlling interest in a furniture
entity. All other operations of the entity are in the meat packing business.
c. Selling by an entity of all its radio stations. The entity’s remaining
activities are television stations and a publishing house.
d. A conglomerate is engaged in commodity business, real estate,
manufacturing and construction business. Selling of any of the four
businesses is a discontinued operation.
Examples which are not
discontinued operation

a. Phasing out of product line within a product group.

b. Shifting of production or marketing activities for a
particular line of business from one location to another
c. Closing of a facility, factory or branch to achieve
productivity improvement or other cost saving.
Income statement
presentation
• PFRS 5, paragraph 33, provides that an entity shall disclose a
single amount comprising the total of post-tax profit or loss of
the discontinued operation and the post-tax gain or loss
recognized on the measurement to fair value less to cost of
disposal or on the disposal of the assets or disposal group
constituting the discontinued operation.
• Simply stated, the income or loss from discontinued operation,
net of tax shall be presented as a single amount in the income
statement below the income from continuing operations.
Included in discontinued
operation
a. The amount of revenue, expenses and income or loss
attributable to the discontinued operation during the
current period and the related income tax.
b. An impairment loss is recognized when the fair value less
cost of disposal of the discontinued operation is lower than
the carrying amount of the net assets. If the fair value less
cost of disposal is higher than the carrying amount the
expected gain is not recognized.
c. Any gain or loss from the actual disposal of the assets
and settlement of the liabilities of a discontinued operation
is recognized on the date of sale or date of settlement.
d. The termination cost of employees and other costs which
are directly incurred as a result of the discontinuance.
Presentation in statement of
financial position
• PFRS 5, paragraph 38, provides that an entity shall also present
separately on the face of the financial position the following
information:
a. Assets of the component held for sae separately from all other assets.
b. Assets of the component held for sale re measured at the lower of
fair value less to cost of disposal and their carrying amount.
c. Liabilities of the component separately from all other liabilities.
d. Nondepreciation – noncurrent assets of the component held for sale
shall not be depreciated.
PFRS 5, paragraph 3, provides that the assets of the component shall
be presented as a single amount under current assets of the
component shall be presented as a single amount under current
liabilities.

The assets and liabilities of the component cannot be offset against

the other.

PFRS 5, paragraph 40, further provides that if a disposal is classified

as held for sale in the current year, an entity shall not reclassify
or re-present the assets and liabilities of the disposal group for the
prior period to reflect the “held for sale” classification in the
statement of financial position as of the end of the current reporting
period.

In other words, the presentation of the assets and liabilities of the

disposal group in the prior period is not changed.
Cash flow presentation

• PFRS 5, paragraph 33, provides that the net cash flows

attributable to the operating, investing and financing
activities of a discontinued operation shall be separately
presented in the statement of cash flows or disclosed in
the notes.