AS -24

Rajiv K. Doshi

DISCONTINUING OPERATIONS

Level I Mandatory Wef. 01.04.2004

Listed Company Under Listing Process Banks & Co. Op. Banks FI Insurance Company Turnover > 50 Cr. (Exclusive other income) Borrowing & public Deposits > 10 Cr. (at any time) Holding & Subsiding Enterprise of any above

What if subsequently ceased to be covered? – two years

AS-24 & I.T.

Does not directly affect. Issue of allowing losses of discontinuing operations. Block of Asset.

Discontinuing Vs Discontinued

Objective

To establish principles for reporting information about discontinuing operation, thereby enhancing the ability of users of financial statement to make projection of enterprises cash flows, earnings generating capacity and financial position by segregating information about discontinuing operation from information about continuing operations.

Definition A discontinuing operation is a component of an enterprise

That the enterprise pursuant to single plan

Disposing of substantial Disposing of piecemeal Terminatingin its entirety e.g. by selling, e.g. selling of assets, Selling throughSpin off of ownership. Settling its liability. Abandonment

That represents a separate major line of business or geographical area of operation.

That can be distinguished operationally and for financial reporting purpose (Segment Reporting AS 17)

Alternatively

Overall plan to discontinue the entire line of business or geographical area which can be distinguished operationally and for financial reporting purpose.

It can be

Entirety Sale Single or or Transaction orPiecemeal Abandonment series of Transaction

Acid Tests

The result of operation of the segment being sold or abandoned can not be separately identified. Gradual or evolutionary phasing out of a product line or class of services. Discontinuing (even abruptly) several products within on going line of business. Shifting of some production or marketing activities for a particular line of business from one location to another. Closing a facility to achieve productivity improvement or cost savings. Subsidiary is entirely sold but the business of subsidiary is also carried out by parent or other subsidiary. Disposal of two or more unrelated assets that individually do not constitute a segment. Scale down of operation.

Example:Holding Ltd. (H) holds 60% equity in subsidiary Ltd. (S). During the year, it sold off 20% equity. As a result S ceased to be subsidiary of H.

Abandonment

Pursuant to over all plan To discontinue the entire line of business or geographical area. Which can be distinguished operationally and for financial reporting Operation distinguishable operationally and for financial reporting

Operating assets and liabilities of the component can be directly attributed to it. Its revenue could be directly attributed to it. At least a majority of its operating expenses can be directly attributed to it.

Meaning of directly attributed : Assets, liabilities, revenue and expenses are directly attributably to a component if they would be eliminated when the component is sold, abandoned etc.

Example:Close a facilityAbandon product / product lines,Change the size of work force

Going Concern Vs. Discontinuing Operation

If the enterprise discontinues a substantial part of its operations as a result of which it has no other

operations to carry. It would cease to be going concern.

If the enterprise merely disposes off its other business profitably, it would continue as going concern.

Initial Disclosure Event

Earlier of Binding Sales agreement for substantially all the assets attributable to

discontinuing operation. BOD has (I) Approved detailed formal plan AND (II) Made an announcement of plan.

MOU / Business Transfer Agreement

Whether the agreement is legally binding one or conditional on several factors Compulsion on both the part.

Contests of Detailed Formal plan

Identification of the major assets to be disposed of Expected method of disposal Expected period for completion Principal locations affected. Location, Function and approximate number of employees to be compensated. Estimated proceeds on salvage

Announcement of Plan

Announcement of main features to those affected such as lenders, stock exchange, creditors, trade union, etc. In sufficiently specific manner

Example:A pre year end decision to close a division not communicated to affected parties (Workers, Customers etc.)

Contents of Initial Disclosure

Description of discontinuing operation. Business or geographical segment. Date & nature of initial disclosure event. Period in which discontinuance is expected to be completed. Carrying amount of assets to be disposed of and liabilities to be

settled. Revenue & expenditure in respect of ordinary activities attribute

able to the discontinuing operations during the current financial reporting period.

Amount of pre tax profit or loss from ordinary activities attributable to discontinuing operation and amount of Income Tax.

Amount of Net Cash Flow attributable to discontinuing operation. Assets, Liabilities, Revenue, Expenses, Gain, Loss, and Cash Flow

pertaining to discontinuing operation would be disposed off, settled, reduced, and eliminated when discontinuance is completed. If such items continue after completion of discontinuance, they can not be allocated to discontinuing operation.

Example: Salary of continuing staff

Discontinuance After Balance Sheet Date

Contingencies & Events occurring after Balance Sheet Date (AS 4)

Disclosures other then Initial Disclosures

Gain or loss and I.T. relating to it on disposal of asset and settlement of liability. Net selling price or range of prices, expected timing and carrying amount of assets for which binding agreements are made. AS 4

Disclosures in period subsequent to Initial Disclosure

Description of significant changes in the amount or timing of cash flow Events causing these changes

Period up to which discontinuing disclosure required

Plan is substantially completed Payment from buyers!

Abandonment / Withdrawal of discontinuance plan

Fact with reason there of & its effects

More than one Discontinuing Operation

Separate disclosure of each discontinuing operation.

Presentation of AS 24 Disclosure

Note to the financial statement. Profit & loss account

• Pre tax profit/loss from ordinary activity attributed to discontinuing operation• Pre tax gain/loss recognized on disposal of assets or settlement of liability attributed to discontinuing operation.

Extra Ordinary Item! AS 5

Event beyond the control of management

Need to Restate Comparative Information of Prior Period

Segregate assets, liabilities, revenues, expenses and cash flow of continuing & discontinuing operation.

Interim Financial Report AS-25

Significant activities, events, changes in the amount or timing for cash flow

Measurement and Recognition of Profit / Loss

To follow other Accounting Standards

AS 24 does not establish any measurement or recognition principles.

Thank You