Question

In 2010, the Top-slice Golf Company decided to augment their very successful line of golf clubs with a new line of professional caliber golf balls. The executives at Top-Slice were aware of the difficulty of penetrating the golf ball market but feel, with their name recognition and the possibility of receiving endorsements from tour professionals that were playing Top-Slice clubs, chances for success were substantial. The company purchased $175 million of equipment and buildings in 2011 to begin production. The Top-Slice golf ball has not performed up to expectations. The tour professionals did not care for the ball and did not endorse it. Significant improvements in golf balls by Callaway and Nike and the continued dominance of the Titleist ProV1 series made entering the market very difficult.

On July 1, 2017, the Board of Directors voted to sell off the golf ball manufacturing division. The company continued to operate the facility at current levels of production until the sale of the division was completed on June 1, 2018. Top-Slice has a April 30 year end and the controller and CEO are concerned about the proper reporting for the disposal of the golf ball manufacturing division in the year-end April 30, 2018 financials. The company wants to issue the financial statements to the public by the end of June 2018.   You are to draft a report to the controller and CEO identifying the issues and accounting choices associated with reporting the disposal and the authoritative guidance that exists to determine the proper manner of reporting the assets, liabilities, and results of operation for the division.

Answer 1

IFRS 5, ‘Non-current assets held for sale and discontinued operations’, is relevant when any disposal occurs. The held-for-sale criteria in IFRS 5 apply to non-current assets (or disposal groups) whose value will be recovered principally through sale rather than through continuing use. The criteria do not apply to non-assets that are being scrapped, wound down or abandoned.

IFRS 5 defines a disposal group as a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction.

The non-current asset (or disposal group) is classified as ‘held for sale’ if it is available for immediate sale in its present condition and its sale is highly probable. A sale is ‘highly probable’ where: there is evidence of management commitment; there is an active program to locate a buyer and complete the plan; the asset is actively marketed for sale at a reasonable price compared to its fair value; the sale is expected to be completed within 12 months of the date of classification; and actions required to complete the plan indicate that it is unlikely that there will be significant changes to the plan or that it will be withdrawn.

A non-current asset (or disposal group) is classified as ‘held for distribution to owners’ when the entity is committed to such distribution (that is, the assets must be available for immediate distribution in their present condition and the distribution must be highly probable). For a distribution to be highly probable, actions to complete the distribution should have been initiated and should be expected to be completed within one year from the date of classification. Actions required to complete the distribution should indicate that it is unlikely that significant changes to the distribution will be made or that the distribution will be withdrawn. The probability of shareholders’ approval (if required in the jurisdiction) should be considered in the assessment of 'highly probable'.

Non-current assets (or disposal groups) classified as held for sale or as held for distribution are:

measured at the lower of the carrying amount and fair value less costs to sell;

not depreciated or amortized; and

presented separately in the balance sheet (assets and liabilities should not be offset).

A discontinued operation is a component of an entity that can be distinguished operationally and financially for financial reporting purposes from the rest of the entity and:

represents a separate major line of business or geographical area of operation;

is part of a single coordinated plan to dispose of a separate major line of business or major geographical area of operation; or

is a subsidiary acquired exclusively with a view for resale

An operation is classified as discontinued only at the date on which the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation. Although balance sheet information is neither restated nor re measured for discontinued operations, the statement of comprehensive income information does have to be restated for the comparative period.

Discontinued operations are presented separately in the income statement and the cash flow statement. There are additional disclosure requirements in relation to discontinued operations.

The date of disposal of a subsidiary or disposal group is the date on which control passes.

The consolidated income statement includes the results of a subsidiary or disposal group up to the date of disposal; the gain or loss on disposal is the difference between

the carrying amount of the net assets plus any attributable goodwill and amounts accumulated in other comprehensive income (for example, foreign translation adjustments and available-for-sale reserves); and

the proceeds of sale.

Corporate liquidation

Corporate liquidations of property generally are treated as a sale or exchange. Gain or loss generally is recognized by the corporation on a liquidating sale of its assets.

Allocation of consideration paid for a business

The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method to allocate the consideration to each business asset transferred. This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. It also determines the buyer's basis in the business assets.

Consideration

The buyer's consideration is the cost of the assets acquired. The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets.

Residual method

The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets.

The residual method provides for the consideration to be reduced first by the cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposits). The consideration remaining after this reduction must be allocated among the various business assets in a certain order.

Journal entries while closing down the business are:

Sell Assets

Basically, the first step a company must make is to take inventory and sell all assets when closing its doors; but before doing that, try to collect all outstanding accounts receivable -- they could be difficult to get later. When selling assets, businesses may not seek full value for non-cash assets, such as buildings, land, equipment, vehicles. Getting the best price may result in simply obtaining enough cash to pay off all liabilities. The entries to remove assets from the books include debiting cash and crediting each asset account for the monies received. A debit or credit to loss or gain on asset sale is necessary to record the difference between cash received and asset value.

Settle Liabilities

After selling off your assets, it's time to pay any outstanding debts or liabilities related to the business. Essentially, liabilities represent any money owed to outside parties, such as vendors and lenders, any taxes or fees owed to the government. If preferred, an accountant can pay these items off, as long as the company has available cash. The entry will debit the liability account and credit cash as the company pays off the liability. Creditors usually expect full payment from the business, unless the forced closing of a company comes from a bankruptcy or other significant issue.

Distribute Remaining Funds

A company with shareholders will pay investors last, if any funds remain. These individuals rarely receive any money when a company closes its doors. A distribution to repay shareholders will debit shareholders' equity and credit cash, and then shareholders return their shares. A smaller business with an owner draw account works similar to the shareholder entries. Any final cash results in a debit to owner draws and a credit to cash for the final balance. In a partnership, any remaining funds or assets are distributed based on each member's capital account, assuming there's a positive capital balance.

Final Entries

If a company is making its accounting entries after closing its physical location, no lagging expenses exist. In some cases, however, a company will need to retain enough cash to pay the final expenses associated with its physical location. This includes rent, utilities and security, among other basic costs. Accountants will debit the expense account and credit cash. Closing expenses to retained earnings will be the final entry for this set of transactions. After completely closing a business, the law likely requires that you keep all business records for up to seven years, depending on where you operated. Although closing a business may not be easy, think of it as a valuable learning curve to help you navigate life's next adventure