IFRS® 5, Non-current Assets Held for Sale and Discontinued Operations

The FR examining team is aware that candidates find the application of IFRS® 5, Non-current Assets Held for Sale and Discontinued Operations challenging.

This article will specifically address discontinued operations. The identification of and, more importantly, presentation of a discontinued operation is an area where candidates struggle in exam questions. As we will see, IFRS 5 requires the results of discontinued operations to be presented separately in the statement of profit or loss and other comprehensive income.

‘Non-current assets held for sale’ are part of the FR syllabus but are not covered by this technical article.

What is a discontinued operation?

IFRS 5 (Appendix A) includes the following defined terms:
 

Examples of discontinued operations in recent annual reports include:

• In 2018, Mexico’s Coca-Cola FEMSA – the world’s biggest franchise bottler of Coca-Cola trademark drinks – sold its 51% controlling shareholding in Coca-Cola FEMSA Philippines for $715 million. This disposal meant that the entity sold a component representing a geographical area of operations.
• In 2022, Germany’s adidas – one of the world’s leading sports companies – sold its entire shareholding in Reebok for €2.1 billion and generated a profit from discontinued operations of €348 million. This disposal meant that the entity sold a component representing a separate major line of business.

Discontinued operations may be examined in the context of an individual company or a group of companies. Both above examples represent the disposal of a subsidiary.

How do I present a discontinued operation?

As provided in IFRS 5 (para 31), an entity shall disclose:

a) a single amount in the statement of comprehensive income comprising the total of:

i) the post-tax profit or loss of discontinued operations, and
ii) the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets of the discontinued operation.

b) an analysis of the single amount in (a) into:

i) the revenue, expenses and pre-tax profit or loss of discontinued operations
ii) the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets of the discontinued operation, and
iii) the income tax expense on the above items.

To summarise:

a) a single figure for discontinued operations is presented on the face of the statement of profit or loss and other comprehensive income; and

b) a more detailed analysis of this is presented in the notes to the financial statements.

An alternative approach is to present a column for the results of continuing operations and a column for the results of discontinued operations (effectively showing two statements). This is very time consuming and is not the approach taken in the FR exam.

You will not be required to prepare detailed notes to the financial statements in the FR exam.

Both IAS 1, Presentation of Financial Statements and IFRS 5 provide a pro forma for presenting discontinued operations in the statement of profit or loss. This is combined into the following:
 

As can be seen, the income and expenses of continuing operations are detailed line by line. This means that continuing and discontinued operations must be separated (and so, workings will be required in an exam question).

The FR exam may assess this topic as part of a group accounting question. If an entire subsidiary is disposed of and if this meets the criteria for a discontinued operation, then its results are consolidated up to the date of disposal. However, in accordance with IFRS 5, this must be presented as a single line item.

We can apply what we’ve covered so far to an illustrative example.

Illustrative example – Tùzǐ Group

There has been no intra-group trading and so Lǎohǔ Co requires no consolidation adjustments for the consolidated statement of profit or loss. Instead, we simply consolidate its results up until the date of disposal.

The following approach should be taken when addressing the disposal of Niú Co:

1. Calculate profit (or loss) only for the six months to 1 July 20X3 (results accrued evenly across the year).

2. Calculate the profit (or loss) on disposal of the subsidiary.

3. Present, in a single line item in the consolidated statement of profit or loss, the profit (or loss) for the year from discontinued operations (the total/ net of the above items).

The proceeds received from the disposal have been incorrectly recognised in ‘investment income’. After the proceeds had been debited to bank in its individual financial statements, Tùzǐ Co should have credited the investment in the subsidiary and recognised a profit or loss on disposal. This would then be adjusted on consolidation.

We also need to recognise the non-controlling interests’ share of current year profits. Note that the non-controlling interests in this question relate solely to the discontinued operation (as Lǎohǔ Co is wholly owned). This is relevant for the apportionment of profit in the consolidated statement of profit or loss.

Step 1

Step 2

Step 3

Consolidated statement of profit or loss

Notes

• Lǎohǔ Co’s income and expenses are included line by line within continuing operations.
• Profit for the year from discontinued operations attributable to the owners of the parent includes the Tùzǐ Co’s profit on disposal of the subsidiary ($66.08m) and 80% of Niú Co’s profit for the six months up to disposal (80% x $28.6m).
• Profit for the period from discontinued operations attributable to non-controlling interests is calculated as 20% of Niú Co’s profit for the six months up to disposal (20% x $28.6m).
• Non-controlling interests are not entitled to a share of the parent company’s (Tùzǐ Co’s) profit on disposal of the subsidiary.

Summary

Under IFRS 5, a discontinued operation may be presented as a single line item within the statement of profit or loss and other comprehensive income or an entire separate column, detailed line by line. If the former approach is taken, a disclosure note must present a more detailed analysis.

Written by a member of the Financial Reporting examining team