Discontinued operations represent significant business operations being sold, ceased, or terminated during a financial year and an event such as a disposal of a fixed asset does not amount to a discontinued operation.
International Financial Reporting Standards (IFRS 5) gives accounting guidance on the treatment of continuing and discontinued operations. The preferred treated recommended by IFRS 5 is that the results of the continuing and discontinued operations must be disclosed separately on the face of the profit and loss account.
Under IFRS 5 discontinued operations must be separately disclosed if they are significant or material, if the discontinuance is permanent, and also that the discontinuance involves the closure of a part of a business.
Reporting of Discontinued Activities
The profit and loss account must show separately the performance of the discontinued activities separately from those of continuing activities to ensure that the financial information being disclosed is both relevant to the needs of users and reliable. To also ensure comparability of financial information the prior year accounts must also be re-drafted or restated to include the results of the discontinued operation separately.
IFRS 5 allows the business to report discontinued operations in the profit and loss account using one of the following alternatives:
- The business can elect to disclose only the profit or loss made by the discontinued business in the profit and loss account. The business should then make a full disclosure of the discontinued events in the notes to the accounts. The note to the accounts should disclose the detailed financial results of the discontinued activity or the sold part of the business.
- The business can also elect to disclose on the face of its accounts the profit or loss made by the discontinued operations. The profit and loss will disclose in detail the breakdown of the revenues, operating costs, interest costs, and the taxation relating to the discontinued operations.
Why should Discontinued Operations be Disclosed Separately?
The performance of discontinued operations is disclosed separately from the performance of continuing events to allow the users of accounting information to:
- Appreciate the financial effects of the closure or sale of the discontinued operation. If the performance of the discontinued operation is disclosed separately users of accounting information will be able to understand the amount of business that has been lost, the part that will no longer be part of the business in future. They will be able to understand what both the future revenue streams and cost structures of the remaining business will be in future.
- Appreciate the underlying performance of the remaining business. Users will be able to ascertain the likely future returns that the new or remaining business will generate in future. Users will be able to glean from the size of this retrenchment the size of the business lost, therefore they will be able to forecast and make more informed judgements of the remaining business.
Munya Mtetwa - Munya is an ACCA and IFA qualified accountant with over ten years financial management and accounting experience acquired in a plethora of ...
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