Question

Should the following be classified as held for sale or discontinued operations? Explain your rationale in detail.

a) Dark Ltd is committed to a plan to sell its staff quarters in Ho Man Tin and has engaged a property agent to locate a buyer. Dark Ltd’s employees will use the Ho Man Tin staff quarters until the completion of the new staff quarters in Kowloon Bay in six months’ time. The Ho Man Tin staff quarters can be transferred to the buyer when all employees move out.

b) Dark Ltd has been using two factories to manufacture traditional light bulbs. An increasing demand for LED lights has caused a significant drop in sales of the light bulbs. Dark Ltd has decided to move all the production facilities to one of the factories but keep the empty factory in the hope that the demand for traditional light bulbs may go back up in the near future

Answer 1

Discontinued Operations :

It is the business operation or segment of an entity which is being disposed off pursuant to a single plan Completely or in Installments or Terminated. The segment is an identifiable segment and can be used for the purpose of reporting in individual capacity with in sepearte line of opeartions or geographical area.

There are many activities which are not disposed off but are considered to be Discontinued Operations , such as :-

- shifiting of promotional activities to other activities.

- decline in the production of one product / product class

- temporarily closure to any product / product class/product .

- shut down of factory/entuty for the purpose of Improvement.

In the given question,

A) It can be classified as held for sale :

Darl LTD. has a plan to sell the staff quaters with in a period of 6 months. There is an active involvement by the management to locate the intended buyer and has taken services of an agent with the intension to disposed off with minimum restrictions.Tthe staff Quaters will be vacated with in 6months till the completion of new staff quater. It can disposed completely or in installments.

B) It can be classified as Discontinued Operation:

As mentioned above, Drak ltd has 2 factories for manaufacturing light bulbs. Temporarily closure to one of the factory by Drak ltd and moving off all the production factory is deemed to be discontinued operation. Shuting down of the factory and moving of operations to one location is termed as discontinued operation. The other factory has kept close keeping in mind that the demand might go up in near future.