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Discontinued operations
Extract from FRS102: Section 5.7E-5.7F
5.7E An entity shall also disclose on the face of the income statement (or statement of comprehensive income if presented) an amount comprising the total of:
(a) the post-tax profit or loss of discontinued operations; and
(b) the post-tax gain or loss attributable to the impairment or on the disposal of the assets or disposal group(s) constituting discontinued operations.
A line-by-line analysis shall be presented in the income statement (or statement of comprehensive income if presented), in a column identified as relating to discontinued operations, i.e. separately from continuing operations; a total column shall also be presented.
5.7F An entity shall re-present the disclosures in paragraph 5.7D for prior periods presented in the financial statements so that the disclosures relate to all operations that have been discontinued by the end of the reporting period for the latest period presented.
OmniPro comment
Appendix I of FRS 102 provides a definition of a discontinued operation. ‘A discontinued operation is a component of an entity that has been disposed of and which:
- Represents a separate major line of business or geographical area of operations;
- Is part of a single 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.’
A component is defined in FRS 102 as ‘operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity’.
In order for it to be classified as discontinued it must be disposed of (sold or closed) by the balance sheet date. It is not enough to just have given notice of the closure to the public, the closure must have occurred.
Example 5: Discontinued operations not ceased
Company A has two businesses. At the year end the Company had informed employees of the intention to close one of these businesses however the business would not close fully until 3 months following the year end. As the business has not ceased by the year end it should not be disclosed as a discontinued operation at the balance sheet. The usual provisions will be recognised in the financial statements however for closure costs.
See example below extracted from the Appendix to Section 5 which illustrates the requirements for discontinued operations in a single statement format:
Statement of comprehensive income for the year ended 31 December 20X1
|
|
|
20X1 |
|
|
20X0 |
|
|
|
Continuing operations |
Discontinued operations
|
Total |
Continuing operations (as restated) |
Discontinued Operations(as restated) |
Total |
|
|
CU |
CU |
CU |
CU |
CU |
CU |
|
Turnover |
4,200 |
1,232 |
5,432 |
3,201 |
1,500 |
4,701 |
|
Cost of Sales |
(2,591) |
(1,104) |
(3,695) |
(2,281) |
(1,430) |
(3,711) |
|
Gross Profit |
1,609 |
128 |
1,737 |
920 |
70 |
990 |
|
|
|
|
|
|
|
|
|
Administrative Expenses |
(452) |
(110) |
(562) |
(418) |
(120) |
(538) |
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|
|
|
|
|
|
|
|
Other operating income |
212 |
_ |
212 |
198 |
_ |
198 |
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|
|
|
|
|
|
|
|
Profit on disposal of operations |
_ |
301 |
301 |
_ |
_ |
_ |
|
Operating profit |
1,369 |
319 |
1,688 |
700 |
(50) |
650 |
|
Interest receivable and similar income |
14 |
_ |
14 |
16 |
_ |
16 |
|
Interest payable and similar charges |
(208) |
_ |
(208) |
(208) |
_ |
(208) |
|
Profit on ordinary activities before tax |
1,175 |
319 |
1,494 |
508 |
(50) |
458 |
|
|
|
|
|
|
|
|
|
Taxation |
(390) |
(4) |
(394) |
(261) |
3 |
(258) |
|
Profit on ordinary activities after taxation and profit for the financial year |
785 |
315 |
1,100 |
247 |
(47) |
200 |
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|
|||||
|
Actuarial losses on defined benefit pension plans |
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|
(108) |
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|
(68) |
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|
peferred tax movement relating to actuarial losses |
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|
28 |
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|
18 |
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|||||
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|
Total comprehensive income for the year |
|
|
1,020 |
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|
150 |
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|||||
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|
Note: On enactment of the Companies (Accounting) Act 2016 which is expected in early 2017, the words “on ordinary activities” in the profit and loss account above will be no longer permitted. The words “interest payable and similar charges’ will be replaced with ‘interest payable and similar expenses.”
Prior year adjustments
Extract from FRS102: Section 5.8
5.8 Under this FRS, the effects of corrections of material errors and changes in accounting policies are presented as retrospective adjustments of prior periods rather than as part of profit or loss in the period in which they arise (see Section 10).
OmniPro comment
Section 10 of this website has detailed the requirements for the presentation for a prior year adjustment and a change in accounting policy. In effect the prior year comparatives must be restated to correct the prior year errors which includes the profit and loss, other comprehensive income and balance sheet where the adjustments affect those areas. The profit and loss and other comprehensive income should have the word ‘Restated’ over the comparative year.
Exceptional items
Extract from FRS102: Section 5.9A and Section 5.10-5.10B
5.9A When items included in total comprehensive income are material, an entity shall disclose their nature and amount separately, in the statement of comprehensive income (and in the income statement, if presented) or in the notes.
5.10 An entity applying paragraph 5.5(a) or 5.7(a) shall not present or describe any items of income or expense as ‘extraordinary items’ in the statement of comprehensive income (or in the income statement, if presented) or in the notes.
Paragraphs 5.10A and 5.10B apply to entities applying paragraphs 5.5(b), 5.5(c), 5.5(d), 5.7(b), 5.7(c) or 5.7(d).
5.10A Ordinary activities are any activities which are undertaken by a reporting entity as part of its business and such related activities in which the reporting entity engages in furtherance of, incidental to, or arising from, these activities. Ordinary activities include any effects on the reporting entity of any event in the various environments in which it operates, including the political, regulatory, economic and geographical environments, irrespective of the frequency or unusual nature of the events.
5.10B Extraordinary items are material items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activities of the reporting entity and which are not expected to recur. The additional line items required to be presented by paragraph 5.9 and material items required to be disclosed by paragraph 5.9A, are not extraordinary items when they arise from the ordinary activities of the entity. Extraordinary items do not include prior period items merely because they relate to a prior period.
OmniPro comment
Exceptional items
It is clear where exceptional items are material they should be appropriately disclosed in the profit and loss.
Materiality can be determined by an item’s size and nature. Example of exceptional items include (as detailed in IAS 1 of IFRS):
- Cost or provision of a major restructuring of operations e.g. a large voluntary and forced redundancies based on the size of the entity
- Profit/loss on disposal of investments
- Impairment/write down of tangible fixed assets
- Impairment of investments
- Impairment of inventories
- Write down on inventories
- Provision for closure costs
- Reversal of prior year impairments or provisions in relation to the above.
- Litigation settlements
- Other reversals of provisions
Where an item is a reoccurring item (e.g. fair valuing investment properties year on year) then this is not an exceptional item as it is a transaction in the normal course of business. A consistent approach should be adopted in that an entity cannot only choose to show losses as exceptional items but they also must show gains as exceptional items if they are of a similar nature e.g. reversal of prior year impairments previously disclosed as exceptional.
Gains and losses should not be netted when disclosing the exceptional items, they should be shown separately.
An exceptional item should only be shown on the face of the profit and loss account where it is relevant to the user of financial statements in understanding the results. If it is not it should be disclosed in the notes.
As FRS 102 does not define exceptional items, entities will have to include in a note to the financial statements what they define as exceptional in the notes to the financial statements. See below an example of such a disclosure.
Example 6: Exceptional item disclosure note for an accounting policy
Exceptional items
Exceptional items are those that the Directors’ view are required to be separately disclosed by virtue of their size or incidence to enable a full understanding of the Company’s’ financial performance. The Company believe that this presentation provides a more informative analysis as it highlights one off items. Such items may include restructuring, impairment of assets, profit or loss on disposal or termination of operations, litigation settlements, legislative changes and profit or loss on disposal of investments. The company has adopted an income statement format that seeks to highlight significant items within the company results for the year.
Whether an exceptional item is shown on the face of the profit and loss above the operating profit line or not will depend on the method adopted to analyse the costs (i.e. by function or by nature of expense) and the type of exceptional expense. Usually if the expenses are displayed by nature then it is usually unlikely it could be shown above the operating profit line as it would have to be included within the expense that it would fall into. Where there is no overlap it may be appropriate to include it separately above the line e.g. legal provisions etc. Therefore in this instance a boxed presentation approach should be adopted similar to the function of expense layout as discussed below.
When a function of expense layout is adopted the exceptional cost should be included within the function to which they relate in the profit and loss above the operating profit and then a boxed presentation can be included on the face of the profit and loss to show within the box, the operating profit before the exceptional item, then detail the exceptional item and then the operating profit after the exceptional item with a reference to a note where full details of the exceptional item is provided. See illustration of this below.
A note should be included in the financial statements detailing the nature and reason for the exceptional item as well as the tax effect of this.
It would also be possible to show operating profit before exceptional item, then show exceptional item to then show the operating profit after the exceptional item instead of using the box approach.
See below example of the way in which exceptional items should be displayed:
|
Profit and Loss Account |
|
|
|
|
For the Year Ended 31 December 2015 |
|
|
|
|
|
Notes |
2015 |
2014 |
|
|
|
CU |
CU |
|
Turnover |
1 |
XXXXX |
XXXXX |
|
Cost of sales |
|
(XXXX)
|
(XXXX)
|
|
|
|
|
|
|
Gross profit |
|
XXXX |
XXXX |
|
|
|
|
|
|
Selling and distribution costs |
|
(XXX) |
(XXX) |
|
Administrative expenses |
|
(XXX) |
(XXX) |
|
Other operating income |
|
XXX
|
XXX
|
|
|
|
|
|
|
Operating profit |
3 |
900,000 |
XXX |
|
|
|
|
|
|
Operating profit before exceptional item |
|
1,200,000 |
XXX |
|
Impairment of tangible fixed assets |
|
150,000 |
XXX |
|
Restructuring provision |
|
150,000 |
XXX |
|
Operating profit |
|
900,000 |
XXX |
|
|
|
|
|
|
Income from shares in group undertakings |
4 |
XXX |
XXX |
|
Income from shares in other financial assets |
4 |
XXX |
XXX |
|
Income from shares in participating interests |
5 |
XXX |
XXX |
|
|
|
|
|
|
Profit on ordinary activities before interest and taxation |
|
XXXX |
XXXX |
|
|
|
|
|
|
Interest receivable and similar income |
6 |
XXX |
XXX |
|
Interest payable and similar charges |
7 |
(XXX)
|
(XXX)
|
|
|
|
|
|
|
Profit on ordinary activities before taxation |
|
XXXX |
XXXX |
|
|
|
|
|
|
Tax on profit on ordinary activities |
8 |
(XXX)
|
(XXX)
|
|
|
|
|
|
|
Profit for the financial year |
|
1,000,000 |
500,000 |
|
Profit for the financial year attributable to: |
|
|
|
|
|
|
|
Owners of the parent company |
1,000,000
|
500,000
|
|
|
1,000,000 |
500,000 |
Extract from notes to the financial statements
Exceptional item – impairment charge
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Restructuring costs (see (i) below) |
8,000 |
– |
|
Impairment of tangible fixed assets |
8,000 |
– |
|
Amortisation of deferred grants arising on impairment of related assets |
(500)
|
–
|
|
|
7,500 |
– |
(i) During the year the company announced a formal plan to restructure the operations and as a result announced a plan to let employees go. This amount represents the expected cost of redundancy as a result of this decision.
(ii) The directors have reviewed the carrying value of tangible fixed assets, net of associated deferred grants, at the year end in accordance with Section 27 “Impairment of Assets”. As a result, a net impairment loss of CU150,000 (2014: CUNil) has been charged to the profit and loss account for the year. The impairment of CU150,,000 represents an impairment of tangible fixed assets net of a release of related deferred grants of CU10,000. The impairment losses have been allocated to fixed assets categories on a pro-rata basis relative to their pre-impairment carrying values. The impairment loss arose as a result of the material change in the market in which the company operates. Deferred tax has been recognised as a result of this adjustment.
The company’s activities were considered, due to their nature, to form one income-generating unit for the purposes of the impairment review. A pre-tax discount rate of 6%, representing the estimated market rate of return on an investment with equal risk, was applied to the expected future cash flows in the value in use calculation. Value in use was considered to exceed estimated net realisable value. Cash flows have been projected over five years based on management forecasts and budgets. After that a steady growth rate of 1% has been assumed.
Note: On enactment of the Companies (Accounting) Act 2016 which is expected in early 2017, the words “on ordinary activities” in the profit and loss account above will be no longer permitted. The words “interest payable and similar charges’ will be replaced with ‘interest payable and similar expenses.”
Note where exceptional item not shown on the face of the profit and loss
|
Exceptional item |
2015 |
2014 |
|
|
CU |
CU |
|
Administrative expenses in the profit and loss account includes the following exceptional charges: |
|
|
|
|
|
|
|
Provision against investment in subsidiary/joint venture/associate |
XX
|
XX
|
|
|
XX |
XX |
Exceptional item
The exceptional item arose as a result of a settlement reached in respect of litigation initiated against the company upon termination of a licence agreement prior to the year end. This amount which includes provision for all legal and other costs relating to the matter which will be borne by the company is also included within accruals and other liabilities in note XX of the financial statements.
|
Or Exceptional items |
2015 |
2014 |
|
|
CU |
CU |
|
(i) Movement in provision for operating costs to date of closure |
XX |
XXX |
|
|
|
|
|
(ii) Gain on settlement of pension scheme (see (a) below) |
XX
|
(XXX)
|
|
Total |
XXX |
XXX |
(a) Following the closure of the company, the defined benefit pension scheme was wound up with effect from 31 December 2015. On wind-up, the pension scheme had sufficient assets to meet the liabilities of the scheme. The gain arose on closure of the scheme.
Extraordinary items
Extraordinary items are very rare in practice and it would be very unusual to see these being applied in practice as it is very hard to say anything falls outside of the ordinary activities.
Operating profit
Extract from FRS102: Section 5.9B
5.9B This FRS does not require disclosure of ‘operating profit’. However, if an entity elects to disclose the results of operating activities the entity should ensure that the amount disclosed is representative of activities that would normally be regarded as ‘operating’. For example, it would be inappropriate to exclude items clearly related to operations (such as inventory write-downs and restructuring and relocation expenses) because they occur irregularly or infrequently or are unusual in amount. Similarly, it would be inappropriate to exclude items on the grounds that they do not involve cash flows, such as depreciation and amortisation expenses.
OmniPro comment
FRS 102 does not require disclosure of operating profit so if this is included an entity should ensure that all operating expense and income type items are included within that operating profit and that no non-operating expenses are included within the operating profit.
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