The definition: Discontinued operations is a component of an entity that either has been disposed off, or is classified as held for sale, and:
- represents a separate major line of business or geographical area of operations, Discontinued 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. Discontinued operations
and the second definition: A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In other words, a component of an entity will have been a cash-generating unit or a group of cash-generating units while being held for use. Discontinued operations
Judgement is sometimes necessary in deciding whether a disposal represents a discontinued operation . Depending on the facts and circumstances of each transaction, it may not be appropriate to present every ceased activity of the reporting entity as a discontinued operation. Rather the entity should focus on significant elements of its operations.
Significant part of business
To be classified as discontinued, a significant separate part of the entity’s business must have been completely discontinued, OR qualify for classification as ‘held for sale‘ under IFRS 5 rules. Discontinued operations
For example, if a retailer had 25 stores in Ireland and 10 in the UK, and decided to close 5 underperforming stores, this would NOT qualify as a discontinued operation, as it has not ceased a separate line of business. If, however, it decided to close the 10 stores in the UK, this would be considered a discontinued operation, as it is exiting a geographical area of operations. Discontinued operations
In practice, discontinued operations are often activities that have been presented to investors in the past as divisions, business units or with similar organisational terms. The sale or discontinuation of one or more cash generating units (CGUs), as defined in accordance with IAS 36 Impairment of Assets, may also indicate the need to present discontinued operations. Discontinued operations
Classifying business activities as discontinued operations
IFRS 5 does not clarify the conditions for presenting business activities as discontinued operations further than in the basic definitions stated above. This leaves some judgement as to whether the operation is significant or major enough to meet the definition of a discontinued operation. Discontinued operations
1 Significance of the ceased activities
The standard explains that discontinued operations usually will have been a cash-generating unit or a group of cash-generating units while being held for use (IFRS 5.31). A CGU is therefore likely to be the smallest component of an entity whose disposal might give rise to a discontinued operation.
The disposal of a reportable segment is likely to give rise to a discontinued operation. Presenting a reportable segment in accordance with IFRS 8 Operating Segments indicates its significance and also confirms that discrete financial information is available. Moreover, the definition of operating segments under IFRS 8 also relates to a component of an entity (IFRS 8 5), which is similar to the definition of a discontinued operation under IFRS 5. This also applies to reported segments that no longer meet the quantitative thresholds but are presented separately because of their continued significance in accordance with IFRS 8 17.
A subsidiary that was acquired exclusively with a view to resale is considered to be a discontinued operation by definition. The financial results of an entity that acquires a business and resells parts of it in the aftermath of the business combination may therefore be presented as a discontinued operation.
In contrast, a group of productive assets such as a factory that was a component of a CGU and has not been reported as an operating segment would not (if disposed of) be a discontinued operation.
2 Manner and timing of disposal
To be considered discontinued, the component in question must be either:
- classified as held for sale; or
- actually disposed of at the end of the reporting period.
3 Discontinued operations and held for sale classification
If a group of assets (and liabilities) meets the conditions to be classified as held for sale and also represents a major operation , as discussed above, both a disposal group and a discontinued operation arise. However, the linkages between discontinued operations and the held for sale classification are not always so clear. For example:
- A co-ordinated but piecemeal sale of a group of assets and liabilities might represent a discontinued operation, but would not give rise to a disposal group; or
- A plan to abandon an operation (rather than sell it) would not lead to held for sale classification. It would trigger presentation as a discontinued operation only on abandonment.
See also: The IFRS Foundation