Question

QUESTION 1
The objective of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations specifies, amongst other things, accounting for and presentation and disclosure of discontinued operations. Radar’s sole activity is the operation of hotels all over the world. After a period of declining profitability, Radar’s directors made the following decisions during the year ended 31 December 2019:
• it disposed of all of its hotels in country A
• it refurbished all of its hotels in country B in order to target the holiday and tourism market. The previous target market in country B had been aimed at business clients.
Required:
(a) Define a discontinued operation and explain why the disclosure of such information is important to users of financial statements.
(b) Treating the two decisions separately, explain whether they meet the criteria for being classified as discontinued operations in the financial statements for the year ended 31 December 2018.

Answer 1

(a) Define a discontinued operation and explain why the disclosure of such information is important to users of financial statements.

Discontinued Operation

A discontinued operation is a component of an enterprise that has either been disposed of, or is classified as 'held for sale', and

- Represents a separate major line of business or geographical area of operations; and

- Is part of a single, co-ordinated plan to dispose of this separate major line of business or geographical area of operations; or

- Is a subsidiary acquired exclusively with a view to resale.

Importance of disclosure

Such classification and information ensure that the external users get an accurate picture of the company's continued operations. Additionally, the company must also disclose any profit or loss from the sale of a discontinued operation.

Further, the distinction for discontinued operation also becomes very useful at the time of the merger/Acquisition. Such classification gives a clear picture of the company’s potential cash flows.

(b) Treating the two decisions separately, explain whether they meet the criteria for being classified as discontinued operations in the financial statements for the year ended 31 December 2018.

It is given that,

Radar’s sole activity is the operation of hotels all over the world. After a period of declining profitability, Radar’s directors made the following decisions during the year ended 31 December 2019:

(i) it disposed of all of its hotels in country A

(ii) it refurbished all of its hotels in country B in order to target the holiday and tourism market. The previous target market in country B had been aimed at business clients.

Explanation

Classification as a discontinued operation depends on when the operation meets the requirements to be classified as held for sale. From the above definition of "Discontinued operation", an operation shall be categorized as "Discontinued operation" only when that particular operation has either been disposed of or classified as "held for sale"

Further, refurbishing operations to attract holiday and Tourist market does not meet the criteria of "Discontinued operations"

Conclusion

Hence,

(i) Decision to dispose of all of its hotels in country A MEETS the criteria of "Discontinued operations" and hence disclosure in the financial statements is needed.

(ii) Decision to refurbish all of its hotels in country B in order to target the holiday and tourism market DOES NOT MEET the "Discontinued operations" criteria and hence no disclosure in the financial statements is needed