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- 5 Marks
Question
Builsa Ltd (Builsa) is a listed company that assembles 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.
Answer
- Discontinued Operations – IFRS 5:
- The closure of the division must be assessed for classification as a discontinued operation. Under IFRS 5, a discontinued operation is defined as a component of an entity that has been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operations.
- Since the division is classified as a separate business segment and will cease all activities, it can be considered a discontinued operation for financial reporting purposes, assuming all relevant criteria are met. However, since most assets will be redeployed rather than sold, this may not fully meet the definition of held for sale.
- The smaller assets that are to be sold or scrapped may be classified as assets held for sale under IFRS 5 if they meet the relevant criteria.
- Provision for Redundancy – IAS 37:
- A provision for redundancy costs should be recognized under IAS 37 if a constructive obligation exists at the year-end. Since the decision has been communicated to the employees in late May 2018, and individual employees have been identified for redundancy, a provision for redundancy costs should be recognized in the financial statements for the year ended 31 May 2018.
- Non-adjusting Event – IAS 10:
- The division’s closure is scheduled for 31 July 2018, after the reporting date of 31 May 2018. Since the closure has a significant impact on the business, it should be disclosed as a non-adjusting event in the 2018 financial statements under IAS 10 (Events After the Reporting Period), as it does not adjust the financial position as of the reporting date but is material and must be disclosed.
Conclusion:
- The closure of the division should be treated as a discontinued operation only if the assets are classified as held for sale. Otherwise, certain assets may qualify as held for sale, and a provision for redundancy costs should be made. Additionally, the event should be disclosed as a non-adjusting event due to its materiality.
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