Comments from ACCA to the International Accounting Standards Board, January 2009.
ACCA (the Association of Chartered Certified Accountants) is pleased to have this opportunity to comment on the exposure draft (ED) on the above subject. The ED was considered by ACCA's Financial Reporting Committee and I am writing to give you their views.
ACCA has consistently supported the Board in its convergence programme with the FASB as long as this leads to an improvement to IFRS. We do not believe that the proposals in the ED improve the current standard relating to discontinued operations. We are not aware of any major issues with the application of the current standard in general, and have concerns with some of the specific proposals outlined in the ED itself.
We also generally support consistency across financial reporting standards, and can see why the Board may be proposing a definition of discontinued operations using the existing definition of operating segments under IFRS8. However, in this respect we believe that the definition is being set at too high a level, and useful information which is currently being provided may be lost.
Conversely, we believe that the additional requirements to disclose components, regardless of whether they have been presented as discontinued operations in the primary statements, may lead to excessive and confusing information.
We therefore believe that further investigation as to what level of information relating to discontinued operations would be useful to users and preparers is needed in order to justify any amendments to the current standard.
Question 1 - Definition of discontinued operations
IFRS 5 defines a discontinued operation as a component of an entity that either has been disposed of or is classified as held for sale and
(a) represents a separate major line of business or geographical area of operations,
(b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or
(c) is a subsidiary acquired exclusively with a view to resale.
This exposure draft proposes changing the definition so that a discontinued operation is a component of an entity that
(a) is an operating segment (as that term is defined in IFRS 8) and either has been disposed of or is classified as held for sale or
(b) is a business (as that term is defined in IFRS 3 Business Combinations (as revised in 2008)) that meets the criteria to be classified as held for sale on acquisition.
The exposure draft proposes that an entity should determine whether the component of an entity meets the definition of an operating segment regardless of whether it is required to apply IFRS 8.
Question 1(a)
Do you agree with the proposed definition? Why or why not? If not, what definition would you propose, and why?
We can certainly see the rationale for applying the definition of an operating segment as defined in IFRS8 given that an entity would already consider such a 'segment' to be important enough for reporting purposes. In principle, it is clear that the importance given to a segment for the continued operations of an entity should correlate with a major line of business for any discontinued operations.
We further note the emphasis that the ED puts on discontinued activities that represent a 'strategic shift' in the entity's operations. Again in this respect we would agree that it is clear that the disposal of an operating segment would certainly indicate a strategic shift in the business of the entity.
However, we do have significant concerns as to whether this definition is at too high a level. By using the definition linked to segmental reporting, many genuine discontinued operations that would have been disclosed under the current requirements may not be captured in the income statement. This would mean that information relevant to users relating to the on-going nature of an entity's business would not be so clearly displayed.
Thus while we can see some benefit in the proposed definition, especially for those entities that are required to apply IFRS8, we believe that the current definition of a discontinued operation does provide more useful information, and should therefore be retained. We believe that this additional information for all entities outweighs the benefits of a more consistent approach with IFRS8 for a limited number of entities.
Question 1(b)
If an entity is not required to apply IFRS 8, is it feasible for the entity to determine whether the component of an entity meets the definition of an operating segment? Why or why not? If not, what definition would you propose for an entity that is not required to apply IFRS 8, and why?
Clearly preparers who are already applying IFRS8 and users who are faced with the resulting information would be able to benefit from the alignment of the definition of a discontinued operation with that of an operating segment. Although there could be quite differing information requirements for those entities that are not currently required to apply IFRS8, this information should be readily available from management's current information systems.
Our response to Question 1(a), states that we would prefer the definition of a discontinued operation to remain unchanged and not be based on IFRS8. This would still be applicable to all entities anyway and therefore this question would not arise in any case.
Question 2 - Amounts presented for discontinued operations
Under IFRS 8, amounts disclosed for operating segments are the amounts reported to the chief operating decision maker. Nevertheless, although the proposed definition of a discontinued operation refers to operating segments, this exposure draft proposes that the amounts presented for discontinued operations should be based on the amounts presented in the statement of comprehensive income, even if segment information disclosed to comply with IFRS 8 includes different amounts that are reported to the chief operating decision maker.
Question 2
Do you agree that the amounts presented for discontinued operations should be based on the amounts presented in the statement of comprehensive income? Why or why not? If not, what amounts should be presented, and why?
We agree that the amounts presented for discontinued operations should be based on the amounts presented in the statement of comprehensive income, and that these amounts should be readily reconcilable.
Question 3 - Disclosures for all components of an entity that have been disposed of or are classified as held for sale
The exposure draft proposes disclosures for all components of an entity that have been disposed of or are classified as held for sale, except for businesses that meet the criteria to be classified as held for sale on acquisition.
Question 3(a)
Do you agree with the proposed disclosure requirements? Why or why not? If not, what changes would you propose, and why?
While we do not believe that the additional disclosure requirements will be over burdensome from a preparers perspective, we are not convinced that they will necessarily provide further value to users. By including components that have been disposed of, regardless of whether they have been presented as a discontinued operation, not only leads to inconsistency with the broader definition, but risks disclosure of numerous insignificant disposals which we cannot see benefiting users of the financial statements.
Diverging from the main definition also detracts from the usability of that information, given that in principle the objective of additional disclosures should be to provide further, relevant detail to what has been reported in the primary statements themselves. These additional requirements could in fact lead to confusion in terms of reconciling numbers to the income statement.
As we stated in our response to Question 1(a), we are not supportive of the proposed definition for a discontinued operation in the ED. Likewise we do not believe that these additional requirements are necessary. We believe more compelling evidence as to whether users would find more detailed disclosure useful, would be required to support the proposals.
Question 3(b)
Do you agree with the disclosure exemptions for businesses that meet the criteria to be classified as held for sale on acquisition? Why or why not? If not, what changes would you propose, and why?
We agree with the conclusions made by the Board regarding the disclosure exemptions for businesses that meet the criteria to be classified as held for sale on acquisition. It is apparent that any new business, regardless of legal form, which the entity intends to sell, has not contributed to the on going operations of the business, and therefore should not be treated as such (ie a discontinuing operation when disposed of). We therefore agree with the proposed approach.
Question 4 - Effective date and transition
Entities would be required to apply the proposed changes prospectively, from a date to be determined by the IASB after exposure, with one exception: the amounts in the statement of comprehensive income (or in the separate income statement) should be reclassified on the basis of the revised definition of discontinued operations for all periods presented. Earlier application would be permitted.
Question 4
Are the transitional provisions appropriate? Why or why not? If not, what would you propose, and why?
We agree with these.
Last updated: 13 Apr 2012