Week 5

Question 1

What is the criteria for an asset or disposal group held for sale?

Answer 1

• Available for immediate sale in its present condition
• Its sale is highly probable (within a year)
• It must be genuinely sold, not abandoned

Question 2

How do you account for assets or disposal groups held for sale?

Answer 2

• Asset/disposal group must meet criteria
• Once classified, measure at the lower of: carrying value and (FV - costs)
• If (FV - costs) < carrying value, record an impairment loss
  Dr Impairment loss
  Cr PPE asset
• Stop depreciating the asset
• Shown in balance sheet under ‘Assets held for sale’

Question 3

What is a discontinued operation?

Answer 3

Component of a business that has been disposed of (i.e ceased doing it or sold it) or classified as held for sale (i.e expected to be disposed of within a year). A disposal group can also be a discontinued oepration if it meets the requirements.

Question 4

What are the disclosure requirements of a discontinued operation?

Answer 4

• Represents a separate major line of business or geographical area of operations
• Is part of a single coordinated plan to dispose of a separate major line of business geographical area of operations
• Is a subsidiary acquired exclusively with a view to resale

Question 5

Discuss why it is important to have criteria set out in IFRS 5 about when something
should be disclosed as Discontinued Operations (Exam Q)

Answer 5

• Talk about creative accounting
• We have criteria’s about when something can be disclosed as Discontinued Operation is so that directors cannot manipulate the presentation of accounts and provide misleading information to users

Question 6

What is an operating segment?

Answer 6

• An operating segment is defined as:
  May earn revenues/incur expenses from business activities (not ‘centrally controlled’ like HQ)
  Whose results are regularly reviewed by company’s CODM- Chief Operating Decision Maker
  Discrete financial information is available
• How the business is organised internally

Question 7

What are the size thresholds for reportable segments?

Answer 7

• Segment revenue = 10% or more of total revenue (internal + external)
• Segment assets = 10% or more of total assets
• Segment absolute profit or loss is 10% or more of the greater, in absolute amount of:
  Total profits of segments that reported a profit, and
  Total loss of all segments that reported a loss
• If total external revenue of reported segments is less than 75% of total revenue additional segments should be recognised until 75% is reached

Question 8

What are the advantages of segmental reporting?

Answer 8

• Large diversified companies may provide a range of products and services and/or operate in several different economic environments
• Each product/service/economic environment is subject to:
  Different rates of profitability and growth, Different future prospects and opportunities and Different risks
• Users need to be able to evaluate the nature and financial effects of the business activities in which it engages, and the different economic environments in which it operates.
• RELEVANT information, confirms what has happened in the past and allows them to predict which segments are more likely to perform better in the future (and therefore where scarce resource- which segments to plough extra resource into)
• COMPARE the performance of different segments each year

Question 9

What are the disadvantages of segmental reporting?

Answer 9

• Difficult to compare company to company - too much choice (standard allows internal management to choose how to segment business)
• Vague about measures…like measure of a segment
• Allocation of central costs is arbitrary

Question 10

Explain the requirements of IFRS 8 in respect of determining which operating segments should be disclosed (Exam Q)

Answer 10

• Define what an operating segment is
• Define other key terms i.e CODM
• Rules on reporting segmentes (10% TR, TP and TA) and 75% of external revenues rule

Question 11

How do you account for discontinued operations?

Answer 11

• Single separate line item would be included in the statement of comprehensive income, called profit/loss from discontinued operations
• Disclose the following:
  Post-tax profit or loss of the discontinued operation
  Post-tax gain or loss on disposal (if sold)