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DISCONTINUING OPERATIONS

Objective of IAS 35

The objective of IAS 35 is to establish principles for reporting information about discontinuing activities (as defined), 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 activities from information about continuing operations. The Standard does not establish any recognition or measurement principles in relation to discontinuing operations - these are dealt with under other IAS. In particular, IAS 35 provides guidance on how to apply IAS 36, Impairment of Assets, and IAS 37, Provisions, Contingent Liabilities and Contingent Assets, to a discontinuing operation. [IAS 35.17-19]

Discontinuing Operation Defined

Discontinuing operation: A relatively large component of a business enterprise - such as a business or geographical segment under IAS 14, Segment Reporting - that the enterprise, pursuant to a single plan, either is disposing of substantially in its entirety or is terminating through abandonment or piecemeal sale. [IAS 35.2] A restructuring, transaction or event that does not meet the definition of a discontinuing operation should not be called a discontinuing operation. [IAS 35.43]

When to Disclose

Disclosures begin after the earlier of the following:

• the company has entered into an agreement to sell substantially all of the assets of the discontinuing operation; or
• its board of directors or other similar governing body has both approved and announced the planned discontinuance. [IAS 35.16]

The disclosures are required if a plan for disposal is both approved and publicly announced after the end of the financial reporting period but before the financial statements for that period are approved. A board decision after year-end, by itself, is not enough. [IAS 35.29]

What to Disclose

The following must be disclosed: [IAS 35.27 and IAS 35.31]

• a description of the discontinuing operation;
• the business or geographical segment(s) in which it is reported in accordance with IAS 14;
• the date that the plan for discontinuance was announced;
• the timing of expected completion, if known or determinable;
• the carrying amounts of the total assets and the total liabilities to be disposed of;
• the amounts of revenue, expenses, and pre-tax operating profit or loss attributable to the discontinuing operation, and (separately) related income tax expense;
• the amount of gain or loss recognised on the disposal of assets or settlement of liabilities attributable to the discontinuing operation, and related income tax expense;
• the net cash flows attributable to the operating, investing, and financing activities of the discontinuing operation; and
• the net selling prices received or expected from the sale of those net assets for which the enterprise has entered into one or more binding sale agreements, and the expected timing thereof, and the carrying amounts of those net assets.
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How to Disclose

The disclosures may be, but need not be, shown on the face of the financial statements. Only the gain or loss on actual disposal of assets and settlement of liabilities must be on the face of the income statement. [IAS 35.39] IAS 35 does not prescribe a particular format for the disclosures. Among the acceptable ways:

• Separate columns in the financial statements for continuing and discontinuing operations
• One column but separate sections (with subtotals) for continuing and discontinuing operations within that single column
• One or more separate line items for discontinuing operations on the face of the financial statements with detailed disclosures about discontinuing operations in the notes (but the line-item disclosure requirements of IAS 1, Presentation of Financial Statements, must still be met).

In periods after the discontinuance is first approved and announced, and before it is completed, the financial statements must update the prior disclosures, including a description of any significant changes in the amount or timing of cash flows relating to the assets and liabilities to be disposed of or settled and the causes of those changes. [IAS 35.33]

The disclosures continue until completion of the disposal, though there may be cash payments still to come. [IAS 35.35-36]

Comparative information presented in financial statements prepared after initial disclosure must be restated to segregate the continuing and discontinuing assets, liabilities, income, expenses, and cash flows. This helps in trend analysis and forecasting. [IAS 35.45]

IAS 35 applies to only to those corporate restructurings that meet the definition of a discontinuing operation. But many so-called restructurings are of a smaller scope than an IAS 35 discontinuing operation, such as plant closings, product discontinuances, and sales of subsidiaries while the company remains in the same line of business. IAS 37 on provisions specifies the accounting and disclosures for restructurings.

The specified disclosures are required to be presented separately for each discontinuing operation. [IAS 35.38]

Income and expenses relating to discontinuing operations should not be presented as extraordinary items. [IAS 35.41]

Notes to an interim financial report should disclose information about discontinuing operations. [IAS 35.47]