IFRS 5 sets out specific requirements for presentation and disclosure of discontinued operations. A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and (IFRS 5.32)
- represents a separate major line of business or geographical area of operations,
- is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations or
- is a subsidiary acquired exclusively with a view to resale.
Component of an entity
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 (IFRS 5.Appendix A). Paragraph IFRS 5.31 further clarifies that a component of an entity will have been a CGU while being held for use or a separate subsidiary (IFRS 5.36A).
Operations that are abandoned can be classified as discontinued operations once they actually have been abandoned, not at the time when the management decision is made.
Presentation and disclosure of discontinued operations
The post-tax profit or loss of discontinued operations is presented as a single amount in the P/L and OCI. This line includes also the impact of the measurement to fair value less costs to sell or of the disposal of the assets/disposal group constituting the discontinued operation (IFRS 5.33(a)). A breakdown of this one line needs to be provided, and usually it is provided in the notes (IFRS 5.33(b) and (d) and EPS in IAS 33.68). Additionally, net cash flows attributable to the operating, investing and financing activities of discontinued operations should also be disclosed (IFRS 5.33(c)).
Adjustments in the current period to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period should also be classified separately as discontinued operations. Examples of such adjustments are given in paragraph IFRS 5.35.
Intragroup transactions with discontinued operations
Consider the following example:
Example: Treatment of intragroup transactions with discontinued operations
There is a group A containing a subsidiary X, which at some point is classified as a discontinued operation under IFRS 5. Revenue and expenses of A and X are given in the table below. The column ‘A+X’ shows consolidated results of the group A without X being treated as a discontinued operation. We can see that X provides an input to operations of group A and has only intragroup revenue. In producing this revenue, it incurs expenses with external parties.
Let’s discuss two approaches to presentation of consolidated P/L with subsidiary X presented as a discontinued operation.
A – the whole group except X
X – a subsidiary of the group A
Note: you can scroll the table horizontally if it doesn’t fit your screen
|X - discontinued operations|
|A||X||eliminations||A+X||Approach #1||Approach #2|
|Revenue - external parties||1,000||-||1,000||1,000||1,000|
|Revenue - intragroup||-||400||(400)||-||-||-|
|Expenses - external parties||(500)||(350)||(850)||(500)||(500)|
|Expenses - intragroup||(400)||-||400||-||(400)||-|
|Net income (tax ignored)||100||50||150||100||500|
|Income/(loss) of |
Approach #1 treats the whole subsidiary X, i.e. transactions with external parties and intragroup transactions, as a discontinued operation presented in one line. In effect, the line presenting discontinued operations includes intragroup revenue earned by X. Consequently, continuing operations of group A include intragroup expenses incurred with X. The advantage of this approach is that it faithfully presents results of both operations. The disadvantage is that some intragroup transactions are not eliminated on consolidation as required by IFRS 10.
Approach #2 favours full elimination of intragroup transactions. As a result, only transactions with external parties of X are presented as a discontinued operation. The disadvantage of this approach is that it does not faithfully present results of both operations. In our example, it seems as if X is a loss making subsidiary, which obviously is not true. At the same time, the profitability of the rest of group A is overstated, because it does not take into account contribution made by X in earning the revenue.
January 2016 IFRIC update discusses presentation of intragroup transactions between continuing and discontinued operations. IFRIC did not issue any interpretation, but it noted that IFRS 5 cannot override consolidation requirements of IFRS 10, therefore Approach #2 from the example above should be adopted. Entities may want to provide additional information in the notes that would highlight the impact of intragroup transactions between continuing and discontinued operations.
P/L for prior periods should be restated so that all operations that have been classified as discontinued by the end of the current reporting period are presented according to IFRS 5 requirements (IFRS 5.34). No adjustments to comparative data are made for the assets and liabilities in the statement of financial position.
Changes in classification
If an entity ceases to classify a component of an entity as held for sale, the results of operations of the component previously presented in discontinued operations are reclassified and included in income from continuing operations for all periods presented (IFRS 5.36).
The impacts relating to measurement of assets and liabilities (e.g. additional catch-up depreciation) are included in current year P/L of continuing operations (IFRS 5.28).