Discontinuing Operation

A discontinuing operation is a component of an enterprise:

  • That the enterprise, pursuant to a single plan, is:
  • Disposing of substantially in its entirety, such as by selling the component in a single transaction or by demerger or spin-off of ownership of the component to the enterprise’s shareholders or
  • Disposing of piecemeal, such as by selling off the component’s assets and settling its liabilities individually or
  • Terminating through abandonment and
  • That represents a separate major line of business or geographical area of operations.
  • That can be distinguished operationally and for financial reporting purposes.

A reportable business segment or geographical segment as defined in AS 17 ‘Segment

Reporting’, would normally satisfy criterion (b) of the above definition, that is, it would represent a separate major line of business or geographical area of operations. A part or such a segment may also satisfy criterion (b) of the above definition. For an enterprise that operates in a single business or geographical segment and, therefore, does not report segment information, a major product or service line may also satisfy the criteria of the definition.

The sales of assets and settlements of liabilities may occur over a period of months or perhaps even longer. Thus, disposal of a component may be in progress at the end of a financial reporting period. To qualify as a discontinuing operation, the disposal must be pursuant to a single co-ordinated plan.

An enterprise may terminate an operation by abandonment without substantial sales of assets.

An abandoned operation would be a discontinuing operation if it satisfies the criteria in the definition. However, changing the scope of an operation or the manner in which it is conducted is not abandonment because that operation, although changed, is continuing.

Examples of activities that do not necessarily satisfy criterion of the definition, but that might do so in combination with other circumstances, include:

  • Gradual or evolutionary phasing out of a product line or class of service.
  • Discontinuing, even if relatively abruptly, several products within an ongoing line of business.
  • Shifting of some production or marketing activities for a particular line of business from one location to another and
  • Closing of a facility to achieve productivity improvements or other cost savings.

An example in relation to consolidated financial statements is selling a subsidiary whose activities are similar to those of the parent or other subsidiaries.

A component can be distinguished operationally and for financial reporting purposes – criterion (c) of the definition of a discontinuing operation – if all the following conditions are met:

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

Assets, liabilities, revenue, and expenses are directly attributable to a component if they would be eliminated when the component is sold, abandoned or otherwise disposed of. If debt is attributable to a component, the related interest and other financing costs are similarly attributed to it. Discontinuing operations are infrequent events, but this does not mean that all infrequent events are discontinuing operations.

Accounting for Discontinuing Operations under AS-24
Initial Disclosure Event

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