Standard 24: Discontinuing Operations

Standard 24: Discontinuing Operations · Complied AI

(c)

that can be distinguished operationally and for financial reporting purposes.

4 Under criterion (a) of the definition (paragraph 3 (a)), a discontinuing operation may be disposed of in its

entirety or piecemeal, but always pursuant to an overall plan to discontinue the entire component.

5 If an enterprise sells a component substantially in its entirety, the result can be a net gain or net loss. For

such a discontinuance, a binding sale agreement is entered into on a specific date, although the actual transfer of

possession and control of the discontinuing operation may occur at a later date. Also, payments to the seller may

occur at the time of the agreement, at the time of the transfer, or over an extended future period.

6 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

co-ordinated plan.

7 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 an abandonment because that operation, although changed, is

continuing.

8 Business enterprises frequently close facilities, abandon products or even product lines, and change the size of

their work force in response to market forces. While those kinds of terminations generally are not, in themselves,

discontinuing operations as that term is defined in paragraph 3 of this

Standard, they can occur in connection with a discontinuing operation.

9 Examples of activities that do not necessarily satisfy criterion (a) of paragraph 3, but that might do so in

combination with other circumstances, include:

(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, the expected timing of

receipt of those cash flows and the carrying amount of those net assets on the balance sheet date.

24 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.

25 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.

Updating the Disclosures

26 In addition to the disclosures in paragraphs 20 and 23 , an enterprise should include, in its financial statements, for

periods subsequent to the one in which the initial disclosure event occurs, a description of any significant changes

in the amount or timing of cash flows relating to the assets to be disposed or liabilities to be settled and the

events causing those changes.

27 Examples of events and activities that would be disclosed include the nature and terms of binding sale agreements

for the assets, a demerger or spin- off by issuing equity shares of the new company to the enterprise's

shareholders, and legal or regulatory approvals.

28 The disclosures required by paragraphs 20, 23 and 26 should continue in financial statements for

periods up to and including the period in which the discontinuance is completed. 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.

29 If an enterprise abandons or withdraws from a plan that was previously reported as a discontinuing

operation, that fact, reasons therefor and its effect should be disclosed.

30 For the purpose of applying paragraph 29, disclosure of the effect includes reversal of any prior impairment loss

(see AS 28 Impairment of Assets ), or

provision that was recognised with respect to the discontinuing operation.

Separate Disclosure for Each Discontinuing Operation

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

operation.

Presentation of the Required Disclosures

32 The disclosures required by paragraphs 20, 23, 26, 28, 29 and 31 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:

(b)

any significant changes in the amount or timing of cash flows relating to the assets to be disposed or

liabilities to be settled.

Illustration 1

Illustrative Disclosures

This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the

application of the Accounting Standard to assist in clarifying its meaning.

Facts

Delta Company has three segments, Food Division, Beverage Division and Clothing Division.

Clothing Division, is deemed inconsistent with the long-term strategy of the Company. Management has decided,

therefore, to dispose of the Clothing Division.

On 15 November 20X1, the Board of Directors of Delta Company approved a detailed, formal plan for disposal of

Clothing Division, and an announcement was made. On that date, the carrying amount of lakhs minus liabilities of

Rs. 15 lakhs).

The recoverable amount of the assets carried at Rs. 105 lakhs was estimated to be Rs. 85 lakhs and the Company

had concluded that a pre-tax impairment loss of Rs. 20 lakhs should be recognised.

At 31 December 20Xl, the carrying amount of the Clothing Division's net assets was Rs. 70 lakhs (assets of Rs.

85 lakhs minus liabilities of Rs. 15 lakhs). There was no further impairment of assets between 15 November 20X1

and 31 December 20X1 when the financial statements were prepared.

On 30 September 20X2, the carrying amount of the net assets of the Clothing Division continued to be Rs. 70

lakhs. On that day, Delta Company signed a legally binding contract to sell the Clothing Division.

The sale is expected to be completed by 31 January 20X3. The recoverable amount of the net assets is Rs. 60

lakhs. Based on that amount, an additional impairment loss of Rs. 10 lakhs is recognised.

In addition, prior to 31 January 20X3, the sale contract obliges Delta Company to terminate employment of

certain employees of the Clothing Division, which would result in termination cost of Rs. 30 lakhs, to be paid

by 30 June 20X3. A liability and related expense in this regard is also recognised.

The Company continued to operate the Clothing Division throughout 20X2.

At 31 December 20X2, the carrying amount of the Clothing Division's net assets is Rs. 45 lakhs, consisting of

assets of Rs. 80 lakhs minus liabilities of Rs. 35 lakhs (including provision for expected termination cost of

Rs. 30 lakhs).

Delta Company prepares its financial statements annually as of 31 December. 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.

1 Financial Statements for 20X1

1.1 Statement of Profit and Loss for 20X1

The Statement of Profit and Loss of Delta Company for the year 20X1 can be presented as follows:

(Amount in Rs. Lakhs)

20X1

20X0

Turnover

140

150

Operating

expenses

(11)

3 Financial Statements for 20X3

The financial statements for 20X3, would disclose information related to discontinued operations in a manner similar

to that for 20X2 including the fact of completion of discontinuance.

Illustration 2

Classification of Prior Period Operations

This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the

application of the Accounting Standard to assist in clarifying its meaning.

Facts

1 Paragraph 34 requires that comparative information for prior periods that is presented in financial statements

prepared after the initial disclosure event be restated to segregate assets, liabilities, revenue, expenses, and

cash flows of continuing and discontinuing operations in a manner similar to that required by paragraphs 20, 23, 26,

28, 29, 31 and 32.

2 Consider following facts:

(a)

Operations A, B, C, and D were all continuing in years 1 and 2;

(b)

Operation D is approved and announced for disposal in year 3 but actually disposed of in year 4;

(c)

Operation B is discontinued in year 4 (approved and announced for disposal and actually disposed of) and

operation E is acquired; and

(d)

Operation F is acquired in year 5.

3 The following table illustrates the classification of continuing and discontinuing operations in years 3 to 5:

FINANCIAL STATEMENTS FOR YEAR 3 (Approved and Published early in Year 4)

Year 2

Comparatives

Year 3

Continuing

Discontinuing

Continuing

Discontinuing

FINANCIAL STATEMENTS FOR YEAR 4

(Approved and Published early in Year 5)

Year 3 Comparatives

Year 4

Continuing

Discontinuing

Continuing

Discontinuing

FINANCIAL STATEMENTS FOR YEAR 5 (Approved and Published early in Year 6)

Year 4

Comparatives

Year 5

Continuing

Discontinuing

Continuing

Discontinuing

4 If, for whatever reason, five-year comparative financial statements were prepared in year 5, the classification of

continuing and discontinuing operations would be as follows:

FINANCIAL STATEMENTS FOR YEAR 5

Year 1 Comparatives

Year 2 Comparatives

Year 3 Comparatives

Year 4 Comparatives

Year 5

Cont.

Disc.

Cont.

Disc.

Cont.

Disc.

Cont.

Disc.

Cont.

Disc.

Footnotes

* The Standard was earlier notified as part of Companies

(Accounting Standards) Rules, 2006, under Companies Act, 1956. The Standard has been notified as part of Companies

(Accounting Standards) Rules, 2021, under Companies Act, 2013.

1 Attention is specifically drawn to paragraph 4.3 of

the Preface , according to which Accounting Standards are intended to apply only to items which are material.

2 All paragraphs of AS 4

that deal with contingencies are applicable only to the extent not covered by other Accounting Standards prescribed

by the Central Government. For example, the impairment of financial assets such as impairment of receivables

(commonly known as provision for bad and doubtful debts) is governed by AS 4.

3 As defined in Accounting Standard (AS) 22, Accounting for Taxes on

Income .