IFRS 5 - Discontinued operations

1. IFRS 5 - Discontinued operations

2. Executive summary • Under both IFRS and US GAAP, a discontinued operation represents a component of an entity that has been disposed of or is held for sale. In the 2010 edition of the AICPA’s Accounting Trends and Techniques, of the 500 companies surveyed, 44 companies discontinued or planned to discontinue the operations of a component of an entity. • IFRS narrowly defines what qualifies as a discontinued operation. US GAAP more broadly defines discontinued operations and could include asset groups smaller than those allowed under IFRS. ASC 205-20-45-1 also requires that: “(a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.” There is no similar requirement in IFRS.

3. Executive summary • There are differences in the presentation of discontinued operations: • Balance sheet – IFRS does not require restatement of comparative information, while US GAAP does not provide any specific guidance on comparative information. • Income statement – IFRS requires more extensive disclosures than US GAAP. • Cash flows – IFRS 5.33 requires comparative disclosure of “the net cash flows attributable to the operating, investing and financing activities,” while US GAAP does not have a similar requirement.

4. Progress on convergence In September 2008, the Boards issued proposed amendments to ASC 205-20 and IFRS 5 to converge the definition of discontinued operations as well as the related disclosure requirements. The comment period on the exposure draft (ED) ended on January 23, 2009. The Boards decided to align this project timetable with the main financial statement presentation project. The Boards plan to make available a new ED during the second quarter of 2011 that will contain a converged definition of a discontinued operation and related disclosures.

5. Criteria for classification as non-current assets held for sale US GAAP IFRS • The following criteria must be met for a non-current asset (disposal group) to be classified as held for sale: • The assets are available for immediate sale in their present condition. • Management commits to a plan to sell the assets. • Management is actively seeking a buyer. • The sale is probable and will generally occur within one year. • The selling price is reasonable in relation to the current value. • It is unlikely there will be any significant changes to the plan to sell the assets. Similar

6. Criteria for classification as non-current assets held for sale US GAAP • It must be probable the sale will occur within one year. IFRS • It must be “highly probable” the sale will occur within one year. • IFRS 5, Appendix A, defines highly probable as “significantly more likely than probable.” • IFRS 5.8 then goes on to list the criteria for a sale to be highly probable.These criteria are essentially those listed above. Therefore, there are no significant differences between US GAAP and IFRS.

7. Criteria for classification as discontinued operations US GAAP IFRS A discontinued operation is defined as a component of an entity that is held for sale or has been disposed. The definitions under both standards generally allow the inclusion of major lines of business and major geographic areas of operation. Similar

8. Criteria for classification as discontinued operations US GAAP • More broadly defines what qualifies as a discontinued operation and could include asset groups smaller than those allowed under IFRS. • ASC 205-20-45-1 requires that “(a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.” IFRS • No similar requirement.

9. Criteria for classification as discontinued operations Summary US GAAP • Component of an entity held for sale or one that has been disposed. • Operations and cash flows can be clearly distinguished. • Operations and cash flows will be eliminated from ongoing operations. • No significant continuing involvement in the operations. • No similar requirement. IFRS • Component of an entity held for sale or one that has been disposed. • Separate major parts of business or geographic area of operation. • No similar requirement. • No similar requirement. • A single coordinated disposal plan. Convergence: Based on tentative decisions to date, the Boards have decided to adopt a common definition as currently defined under IFRS. The Boards have also agreed on certain disclosures required if an entity retains continuing involvement with a discontinued operation after the disposal date.

10. Example 1 – criteria for classification as a discontinued operation The Copper Mining Company (CMC) is a fully integrated copper company. CMC has three separate operating segments. The mining segment mines the copper and had revenues of $1.0 billion and a net negative cash flow of $0.2 billion. The industrial segment smelts the copper into ingots and had revenues of $1.2 billion and a net cash flow of $0.2 billion. The distribution segment sells the copper ingots to third parties and had revenues of $1.5 billion and a net cash flow of $0.3 billion. Criteria for discontinued operations example Management of CMC has received an unsolicited offer from a competitor for its industrial segment, which it believes reflects the fair value of these operations. The competitor wants to complete the purchase in the next three months. CMC’s Board of Directors has authorized management’s plan to immediately sell its industrial segment to this competitor and retain the remaining two segments. As part of the proposed purchase, the competitor requires CMC to agree to process all its copper ore through its smelters for the next five years at a cost of 4 cents per ton. This is slightly less than CMC’s current cost of smelting the ore. The competitor also requires that CMC’s management continues to manage the industrial segment for six months after the sale. This will allow the competitor to hire its own management team to run the smelting operations. As is currently the case, CMC’s distribution segment would then sell the copper ingots to third parties.

11. Criteria for discontinued operations example • Example 1 (continued): • Does CMC’s industrial segment qualify as a discontinued operation under US GAAP? Explain your answer. • Does CMC’s industrial segment qualify as a discontinued operation under IFRS? Explain your answer.

12. Example 1 solution: US GAAP: The requirements for classification of the industrial segment as a non-current asset held for sale have been met as stated in the discussion above. The operations and cash flows of the industrial segment are clearly distinguishable from the rest of the operations. However, it appears CMC will have significant continuing involvement in the operations of the industrial segment after the disposal date. Therefore, this plan would not qualify for accounting as a discontinued operation. Criteria for discontinued operations example

13. Example 1 solution (continued): IFRS: The requirements for classification of the industrial segment as a non-current asset held for sale have been met: The assets are available for immediate sale in their present condition. Management has committed to a plan to sell the assets. It has a buyer. The sale is probable and likely will occur within one year. The selling price is reasonable in relation to the current value. It is unlikely there will be any significant changes to the plan to sell the assets. The single coordinated plan involves the sale of a component of CMC, which represents a major separate line of business and, therefore, would qualify as a discontinued operation. Criteria for discontinued operations example

14. Valuation of discontinued operations US GAAP IFRS A non-current asset held for sale or a disposal group held for sale should be remeasured at the lower of its carrying value or fair value less selling costs. Any resulting gain or loss will be included in the income or loss of the discontinued operations. Similar

15. Impact on depreciation US GAAP IFRS Both US GAAP and IFRS specify that assets held for sale should not be depreciated. Similar

16. Presentation – impact on comparative financial statements US GAAP IFRS Disclosure of relevant information regarding the discontinued operations is required. Similar

17. PresentationBalance sheet US GAAP IFRS Assets and liabilities of discontinued operations must be shown separately. Similar

18. PresentationBalance sheet US GAAP • No specific guidance on whether comparative information needs to be restated. IFRS • Does not require restatement of comparative information.

19. Example 2a – balance sheet presentation example Company A has met all the requirements for accounting for a discontinued operation under both US GAAP and IFRS in its 2010 comparative financial statements. Indicate the minimum required disclosure for discontinued operations by placing an X in the chart below. If the disclosure is not mandatory, place an NR (not required) in the chart. Balance sheet presentation example

20. Example 2a solution: Both US GAAP and IFRS require that assets and liabilities of discontinued operations be shown separately on the balance sheet. IFRS does not require restatement of comparative information on the balance sheet. US GAAP does not provide any specific guidance on whether comparative information on the balance sheet needs to be restated. Balance sheet presentation example

21. PresentationIncome statement US GAAP IFRS The results of discontinued operations must be shown separately from continuing operations. Similar Comparative information must be restated. Similar Revenue, pretax income (loss) and any gain (loss) on remeasurement for discontinued operations must be disclosed. Similar

22. PresentationIncome statement US GAAP • Requires disclosure of the total tax income related to discontinued operations. IFRS • Requires disclosure of expenses, income taxes on operations and income taxes on gains (losses) on remeasurement related to discontinued operations.

23. Example 2b – income statement presentation Using the information from the previous example, indicate the minimum required disclosure for discontinued operations by placing an X in the chart. If the disclosure is not mandatory place an NR (not required) in the chart. Income statement presentation example

24. Example 2b solution: Both US GAAP and IFRS require the results of discontinued operations be shown separately from continuing operations on the income statement. Comparative information on the income statement must be restated. Both require disclosure of revenue, pretax income (loss) and gain (loss) on remeasurement for discontinued operations. US GAAP requires disclosure of the total income tax related to discontinued operations. IFRS requires disclosure of expenses, income taxes on operations and income taxes on gains (losses) on remeasurement related to discontinued operations. Income statement presentation example

25. PresentationCash flows US GAAP IFRS Cash flow disclosures for discontinued operations are allowed. ASC 205-20-50-4 requires certain footnote disclosures for discontinued operations that generate continuing cash flows. Similar, although the footnote disclosures are required for all discontinued operations.

26. PresentationCash flows US GAAP • No similar requirement for cash flow disclosures of discontinued operations. • ASC 230-10-45-24 states that “An entity that nevertheless chooses to report separately operating cash flows of discontinued operations shall do so consistently for all periods affected, which may include periods long after sale or liquidation of the operation.” IFRS • Requires disclosure of “the net cash flows attributable to the operating, investing and financing activities of discontinued operations. These disclosures may be presented in either the notes or on the face of the financial statements. • Restatement of comparative information for prior periods is also required.

27. Example 2c – cash flows presentation Using the information from the previous example, indicate the minimum required disclosure for discontinued operations by placing an X in the chart below. If the disclosure is not mandatory, place an NR (not required) in the chart. Cash flows presentation example

28. Example 2c solution: IFRS requires disclosure of “the net cash flows attributable to the operating, investing and financing activities of discontinued operations. These disclosures may be presented in either the notes or on the face of the financial statements.” Restatement of comparative information for prior periods is also required. US GAAP does not have a similar requirement for cash flow disclosures of discontinued operations. Cash flows presentation example

29. Treatment when no longer qualified as a non-current asset held for sale US GAAP IFRS • A non-current asset held for sale should be reclassified to assets held and used. The value of these operations should be recorded at the lesser of: • The original carrying amount adjusted for any depreciation (amortization) expense that would have been recognized had the discontinued operation been continuously classified as a continuing operation. • Its current fair value. Similar except recoverable amount is used instead of fair value.

30. Treatment when no longer qualified as a non-current asset held for sale US GAAP • Does not specify that revaluations must be considered when determining the original carrying amount. However, since these operations are being valued at the lesser of the adjusted original cost or the current fair value, it is likely to result in the same valuation. Therefore, this difference is not significant. IFRS • The original carrying amount must also be adjusted for any revaluations had the discontinuing operation been continuously classified as a continuing operation.