Builsa Ltd (Builsa) is a listed company which assemble personal computers (PCs) and it is preparing its financial statements for the year ended 31 May 2018.
Builsa plans to close down one of its divisions. This division, which is classified as a separate
business segment, will cease all of its activities on 31 July 2018. Most of the assets of the business will be redeployed elsewhere in Builsa’s business, however some smaller items of plant will be sold off or scrapped. Approximately half of the staff of the division will be made redundant and they were notified of the decision in late May 2018. Customers and suppliers
were notified at the same time. The annual 2018 financial statements are scheduled to be released to the markets on 9 August 2018.
Required:
Advise the directors as to the financial reporting issues arising from the above matters and explain the appropriate treatment in Builsa’s financial statements in each case. (6 marks)
View Solution
IFRS 5
• The issue here is whether the closure of the division should be accounted for as a discontinued operation under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. A discontinued operation is defined 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, or
b) is part of a single coordinated 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.’
• As the discontinued operation has not been disposed of at the year end, it can only be classified as discontinued in the 2018 financial statements if it meets the definition of ‘held for sale’. Disposal groups are classified as held for sale if ‘their carrying amount will be recovered principally through a sales transaction rather than through continuing use’.
• This is not the case here as most of the assets are being redeployed elsewhere in the business.
• The small assets could potentially be classified as held for sale if all the relevant criteria, but not as a discontinued operation.
IAS 37
• Provision should be made for a redundancy costs if a constructive obligation exists at the year end. This appears to be the case as, assuming a detailed formal plan for the restructuring has been made, and the entity has raised a valid expectation in those
affected that the restructuring will be carried out by notifying them of the redundancy before the year end.
IAS 10
• As the annual financial statements were not scheduled to be released until after the closure of the division, the closure should be disclosed as a non-adjusting event after the reporting period due to its significance to the business (it is a separate operating
segment). (3 points for 6 marks)