ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Chapter 6: Reporting financial performance
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Presentation of a statement of changes in equity (SOCIE) (IAS 1)
Disclosure of information about discontinued operations (IFRS 5). IFRS 5 is
covered in the next section.
Material items
Material items of income or expense should be disclosed separately, showing both
their nature and the amount. Circumstances that would give rise to a separate
disclosure of material items include:
a write-down of inventories to net realisable value
a write-down of property, plant and equipment to its recoverable amount
a reversal of such write-downs
the cost of restructuring
disposals of items of property, plant and equipment
disposals of investments
discontinued operations
the income or expense of settlement of litigation
a reduction in (reversal of) a provision.
As well as being material, most of these items are relatively unusual and may not
occur every year. Users need to be made aware that these items are included in
profit and loss because they may distort the overall result for the period. For
example, if an entity has sold several properties at a profit, its profit for the current
period may be exceptionally high, but will fall to a more normal level in the
following period.
Material items are normally disclosed in the notes, but they may be disclosed as a
separate line item on the face of the statement of comprehensive income (or income
statement if this is presented separately), if they are sufficiently material or unusual
to justify this treatment.
The statement of changes in equity
The statement of changes in equity brings together all of the income and expenses
(gains and losses) for the period. This includes those that have passed through the
income statement and are therefore part of the profit for the period. It also includes
gains or losses that have been taken directly to reserves (equity) such as revaluation
gains or losses on non-current assets or investments.
The statement of changes in equity is a reconciliation of the change in net assets for
the period and enables users to appreciate and assess all the different aspects of the
entity’s performance for the period.
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IFRS5: non-current assets held for sale and discontinued operations
The need for an accounting standard on discontinued operations
Definition of discontinued operations
The measurement of non-current assets and disposal groups held for sale
Presentation and disclosure
3 IFRS5: Non-current assets held for sale and
discontinued operations
3.1 The need for an accounting standard on discontinued operations
IFRS5 Non-current assets held for sale and discontinued operations sets out
requirements for disclosure of financial information relating to discontinued
operations and non-current assets that will soon be sold off.
The reason for requiring disclosure of information about discontinued operations is
as follows:
Closing down some operations will affect the future financial prospects of the
entity.
It is therefore appropriate that users of the financial statements should be
provided with relevant information about the discontinuation. This will help
them to make a more reliable prediction of the future performance of the entity.
This information can be produced by providing information about discontinued
operations separately from information about continuing operations.
3.2 Definition of discontinued operations
IFRS5 defines a discontinued operation as a component of an entity that either:
has been disposed of in the period, or
is classified as ‘held for sale’ (it has not yet been disposed of, but disposal will
occur ‘soon’).
A ‘component’ of an entity is defined as operations and cash flows that can be
clearly distinguished, operationally and for financial reporting purposes, from the
rest of the entity. The component of the entity must:
represent a separate major line of business or a significant geographical area of
operations, or
be a part of a single and co-ordinated plan to dispose of a separate major line of
business or a significant geographical area of operations, or
be a subsidiary company acquired exclusively with a view to re-sale.
Chapter 6: Reporting financial performance
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If an entity disposes of an individual non-current asset, or plans to dispose of an
individual asset in the immediate future, this is not classified as a discontinued
operation unless the asset meets the definition of a ‘component of an entity’. The
asset disposal should simply be accounted for in the ‘normal’ way, with the gain or
loss on disposal included in the operating profit for the year.
Non-current assets held for sale
Non-current assets ‘held for sale’ can be either:
specific non-current assets, or
a ‘disposal group’. A disposal group is a group of cash-generating assets (and
perhaps some liabilities) that will be disposed of in a single transaction.
A disposal group might be, for example, a major business division of a company.
For example accompany that operates in both shipbuilding and travel and tourism
might decide to put its shipbuilding division up for sale. If the circumstances meet
the definition of ‘held for sale’ in IFRS5, the shipbuilding division would be a
disposal group held for sale.
A non-current asset (or a disposal group) should be classified as held for sale if its
carrying amount will be recovered mainly through a sale transaction rather than
through continuing use. For this to be the case:
the non-current asset or disposal group should be available for immediate sale,
in its present condition under terms that are usual and customary; and
its sale should be highly probable.
For the sale to be highly probable:
management must be committed to the sale
an active programme to locate a buyer must have been initiated
the asset or disposal group must be actively marketed for sale at a price that is
reasonable in relation to its current fair value
the sale should be expected to take place within one year from the date of
classification as ‘held for sale’
significant changes to the plan or the withdrawal of the plan should be unlikely.
An operation cannot be classified as discontinued in the balance sheet if the criteria
for classifying it as discontinued are not met until after the end of the reporting
period. For example, suppose that an entity with a financial year ending 30 June
shuts down a major line of business in July and puts another major line of business
up for sale. It cannot classify these as discontinued operations in the financial
statements of the year just ended in June, even though the financial statements for
this year have not yet been approved and issued.
An asset that has been abandoned cannot be classified as ‘held for sale’.
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Example
Entity R had the following assets at 31 March Year 4. Both assets would meet the
definition of ‘component’ of Entity R, as defined by IFRS5.
(1) A property that it offered for sale for $5 million during June Year 3. The
market for this type of property has deteriorated and at 31 March Year 4 a
buyer had not yet been found. Management does not wish to reduce the price
because it hopes that the market will improve. Shortly after the year end (after
31 March Year 4) the entity received an offer of $4 million and the property
was eventually sold for $3.5 million during May Year 4, before the financial
statements were authorised for issue.
(2) Plant with a carrying value of $2.5 million. At 31 March Year 4 the entity had
ceased to use the plant but was still maintaining it in working condition so
that it could still be used if needed. Entity R sold the plant on 14 May Year 4.
Can either of these assets be classified as ‘held for sale’ in the financial statements
for the year ended 31 March Year 4?
Answer
(1) Property
A non-current asset qualifies as ‘held for sale’ if it is available for immediate sale in
its present condition and actively marketed for sale at a price that is reasonable in
relation to its current fair value. The property had not been sold at the year end
although it had been on the market for some time. It appears that the reason for this
was that management were asking too high a price; therefore the price is not
reasonable in relation to its current fair value.
Therefore the property cannot be classified as ‘held for sale’.
(2) Plant
At the year-end management had not made a firm commitment to sell the plant.
Even though the plant was sold just after the year-end, IFRS 5 prohibits the
classification of non-current assets as ‘held for sale’ if the criteria are met after the
end of the reporting period and before the financial statements are signed.
Therefore the plant cannot be classified as ‘held for sale’.
3.3 The measurement of non-current assets and disposal groups held for
sale
Assets held for sale and disposal groups should be valued at the lower of:
their carrying amount (i.e. current values in the statement of financial position,
as established in accordance with accounting standards and principles), and
fair value minus costs to sell.
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If the value of the ‘held for sale’ asset is adjusted from carrying amount to fair value
minus costs to sell, any impairment should be recognised as a loss in the income
statement (statement of comprehensive income) for the period.
A non-current asset must not be depreciated (or amortised) while it is classified as
‘held for sale’ or while it is part of a disposal group that is held for sale.
3.4 Presentation and disclosure
IFRS5 states: ‘An entity shall present and disclose information that enables users of
the financial statements to evaluate the financial effects of discontinued operations
and disposals of non-current assets (or disposal groups)’.
Disclosure in the statement of financial position
Non-current assets classified as held for sale must be disclosed separately from
other assets in the statement of financial position.
Similarly, assets and liabilities that are part of a disposal group held for sale must
be disclosed separately from other assets and liabilities in the statement of financial
position. (The assets and liabilities in a disposal group should not be offset and
presented as a single net amount).
Income statement disclosure
Information about discontinued operations (both operations already discontinued
and those classified as held for sale) must be presented in the statement of
comprehensive income or in a note to the financial statements.
There must be a single amount on the face of the statement of comprehensive
income (or income statement) for the total of:
the after-tax profit or loss for the period from the discontinued operations, and
the after-tax gain or loss on disposal (based on the fair value minus costs to sell
of the asset or disposal group).
On the face of the statement of comprehensive income (or income statement) or in a
note to the accounts, this total amount should be analysed into:
the revenue, expenses and pre-tax profit for the period from the discontinued
operations
the related tax charge
the pre-tax gain or loss on disposal
the related tax on the disposal.
If this analysis is shown on the face of the statement of comprehensive income (or
income statement), it should be presented in a separate section relating to
discontinued operations, separately from continuing operations.
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For comparative purposes, the figures for the previous year should be re-presented,
so that disclosures relating to discontinued operations in the prior period relate to
all discontinued operations up to the end of the current year.
Note on discontinued operations and the statement of cash flows
The statement of cash flows is covered in a later chapter. However, IFRS5 states that
in the statement of cash flows, there should be separate disclosure of the net cash
flows in the period attributable to operating activities, investing activities and
financing activities of the discontinued operations.
These disclosures may be presented either on the face of the statement of cash flows
or in the notes to the financial statements.
Additional disclosures
Additional disclosures about discontinued operations must be included in the notes
to the financial statements. These include:
a description of the non-current asset or disposal group
a description of the facts and circumstances of the sale
in the case of operations and non-current assets ‘held for sale’, a description of
the facts and circumstances leading to the expected disposal and the expected
manner and timing of the disposal.
Example
Information relating to discontinued operations might be presented as follows.
Income statement
ABCDEntity
Incomestatementfortheyearended31December20X9
20X920X8
$000$000
Continuingoperations
Revenue 9,0008,500
Costofsales (5,100)(4,700)
–
–––––
–
–––––
Grossprofit 3,9003,800
Otherincome 50100
Distributioncosts (1,200)(1,000)
Administrativeexpenses (1,400)(1,200)
Otherexpenses (150)(200)
Financecosts (300)(300)
–
–––––
–
–––––
Profitbeforetax 9001,200
Incometaxexpense (300)(400)
–
–––––
–
–––––
Profitfortheperiodfromcontinuingoperations 600800
Chapter 6: Reporting financial performance
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Discontinuedoperations
Profitfortheperiodfromdiscontinuedoperations 250180
–
–––
–
–––
Profitfortheperiod 850980
–
–––
–
–––
Note
The single figure of $250,000 for after-tax profit or loss from discontinued operations
should be analysed in a note to the accounts. Alternatively, the analysis could be
given on the face of the income statement.
Statement of financial position
An entity has two disposal groups held for sale:
Disposalgroup
Group1 Group2
$000 $000
Property,plantandequipment 600 300
Liabilities (50) (20)
–
–––
–
–––
Netcarryingamount 550 280
–
–––
–
–––
An amount of $50,000 relating to the assets of disposal group 1 has been recognised
directly in equity, as a result of an asset revaluation.
The summarised statement of financial position of the entity might be as follows:
$000
Assets
Non‐currentassets
Property,plantandmachinery 2,000
Currentassets
Inventory 300
Receivables 400
Cash 20
–
–––––
2,720
Non‐currentassetsclassifiedasheldforsale
900
–
–––––
Totalassets 3,620
–
–––––
Equityandliabilities
Sharecapital 1,000
Reserves 1,900
Amountsrecogniseddirectlyinequityrelatingto
non‐currentassetsheldforsale
50
–
–––––
Totalequity 2,950
–
–––––
Non‐currentliabilities:loan
400
–
–––––
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Currentliabilities
Tradepayables 200
Liabilitiesdirectlyassociatedwithnon‐current
assetsclassifiedasheldforsale
70
–
–––––
270
–
–––––
Totalliabilities 670
–
–––––
Totalequityandliabilities 3,620
–
–––––
In the statement of financial position, the comparative figures for the previous year
are not re-presented. The amount for discontinued operations in the previous year
does not include discontinued items for the current year. The presentation in the
statement of financial position therefore differs from the presentation in the
statement of comprehensive income (or income statement).
Note: In this summarised statement of financial position, the non-current assets
classified as ‘held for sale’ are the sum of the non-current assets of disposal groups 1
and 2 (= $600,000 + $300,000). Similarly the ‘liabilities directly associated with non-
current assets classified as held for sale’ are the sum of the liabilities for disposal
groups 1 and 2.
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Paper F7 (INT)
Financial reporting
CHAPTER
7
Tangible non-current assets
Contents
1 Recognising and measuring non-current assets
2 Depreciating non-current assets
3 De-recognition of non-current assets
4 Disclosure requirements of IAS16 and IAS23
5 Government grants: IAS20
6 Investment property: IAS40
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Recognising and measuring non-current assets
Introduction
Recognising non-current assets
Measuring non-current assets: the cost model
Subsequent expenditure
Capitalisation of borrowing costs: IAS23
Measuring non-current assets: the revaluation model
1 Recognising and measuring non-current assets
1.1 Introduction
The main accounting standard relating to the recognition and measurement of
tangible non-current assets is IAS16 Property, plant and equipment. However, the
following accounting standards are also relevant.
IAS20: Accounting for government grants and disclosure of government
assistance
IAS23: Borrowing costs
IAS36: Impairment of assets (explained in a later chapter)
IAS40: Investment property.
1.2 Recognising non-current assets
IAS16 states that an item of property, plant and equipment should be recognised as
an asset only when:
it is probable that future economic benefits associated with the item will flow to
the entity, and
the cost of the item can be measured reliably.
For a machine, the future economic benefits are the future revenues that will arise
from the use of the machine in production. The machine will be used to make items
that are held in inventory as finished goods. When those inventories are sold, the
entity will receive economic benefits in the form of cash. It is therefore probable, as
soon as the asset is acquired, that future economic benefits will be obtained. The cost
of the asset can usually be measured reliably when it is acquired; therefore non-
current assets are normally recognised when they are acquired (purchased).
The same principle applies to non-current assets that are constructed by the entity
itself. When an entity constructs a long-term asset, it does so in the expectation that
future economic benefits will be obtained from use of the asset, and the cost can be
measured as its cost of construction.