AS-24: DISCONTINUING OPERATIONS

Objective AS 24 is applicable to all discontinuing operations.

The objective of AS 24 is to establish principles for reporting information

about discontinuing operations, thereby enhancing the ability of users of
financial statements to make projections of an enterprise's cash flows,
earnings-generating capacity, and financial position by segregating
information about discontinuing operations from information about
continuing operations.

Discontinuing A discontinuing operation is a component of an enterprise: (PARA 3)

Operation a) 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
b) That represents a separate major line of business or geographical area
of operations.
c) That can be distinguished operationally and for financial reporting
purposes.

Examples of activities that do not necessarily satisfy criterion (a) 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.

Initial Occurrence of one of the following, whichever occurs earlier:

Disclosure a) The enterprise has entered into a binding sale agreement for
event substantially all of assets attributable to the discontinuing operation or

b) The enterprise's board of directors or similar governing body has both

(i) approved a detailed, formal plan for the discontinuance and
(ii) made an announcement of the plan.

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 A detailed, formal plan for the discontinuance normally includes:
➢ identification of the major assets to be disposed of;
➢ the expected method of disposal;
➢ the period expected to be required for completion of the disposal;
➢ the principal locations affected;
➢ the location, function, and approximate number of employees who will
be compensated for terminating their services; and
➢ the estimated proceeds or salvage to be realised by disposal.

Presentation & An enterprise should include the following information relating to a

Disclosure discontinuing operation in its financial statements beginning with the
(Initial financial statements for the period in which the initial disclosure event
Disclosure)
occurs:
❖ A description of the discontinuing operation(s)
❖ The business or geographical segment(s) in which it is reported as per AS
17
❖ The date and nature of the initial disclosure event.
❖ The date or period in which the discontinuance is expected to be
completed if known or determinable
❖ The carrying amounts, as of the balance sheet date, of the total assets
to be disposed of and the total liabilities to be settled
❖ The amounts of revenue and expenses in respect of the ordinary
activities attributable to the discontinuing operation during the current
financial reporting period
❖ The amount of pre-tax profit or loss from ordinary activities
attributable to the discontinuing operation during the current financial
reporting period, and the income tax expense related thereto
❖ The amounts of net cash flows attributable to the operating, investing,
and financing activities of the discontinuing operation during the current
financial reporting period

Disclosures All the disclosures above should be presented in the notes to the financial
other than statements except for amounts pertaining to pre-tax profit/loss of the
Initial discontinuing operation and the income tax expense thereon (second last
Disclosures
above) which should be shown on the face of the statement of profit and
Note
loss.

Copyright of these notes is with CA. Nitin Goel (IQ Education Worldwide). Contact: 9915005021, 9988451199
Question 1
A Washing articles producing company provide the following information:
Washing bar Washing Powder
January, 2019 – September, 2019 per month 2,00,000 2,00,000
October, 2019 – December, 2019 per month 1,00,000 3,00,000
January, 2020- March, 2020 per month 0 4,00,000
The company has enforced a gradual change in product-line on the basis of an overall plan. The Board of
Directors of the company has passed a resolution in March, 2019 to this effect. The company follows
calendar year as its accounting year. Should this be treated as a discontinuing operation? Give reasons in
support of your answer

Solution
In response to the market forces, business enterprises often abandon products or even product lines and
reduce the size of their work-force. These actions are not in themselves discontinuing operations unless
they satisfy the definition criteria.
In the instant case the company has been gradually reducing operation in the product line of washing
bars, simultaneously increasing operation in the product line of Washing powder. The company was not
disposing of any of its components. Phasing out a product line as undertaken by the company does not
meet definition criteria in paragraph 3 of AS 24, namely, disposing of substantially in its entirety a
component of the enterprise. Therefore, this change over is not a discontinuing operation.

Question 2
Qu Ltd. is in the business of manufacture of Passenger cars and commercial vehicles. The company is
working on a strategic plan to shift from the Passenger car segment over the coming 5 years However no
specific plans have been drawn up for sale of neither the division nor its assets. As part of its plan it will
reduce the production of passenger cars by 20% annually. It also plans to commence another new factory
for the manufacture of commercial vehicles and transfer plus employees in a phased manner.
a) You are required to comment if mere gradual phasing out in itself can be considered as a
‘Discontinuing Operation' within the meaning of AS 24.
b) lf the company passes a resolution to sell some of the assets in the passenger car division and also to
transfer few other assets of the passenger car division to the new factory, does this trigger the
application of AS 24 ?
c) Would your answer to the above be different if the company resolves to sell the assets of the Passenger
Car Division in a phased but time bound manner?

Copyright of these notes is with CA. Nitin Goel (IQ Education Worldwide). Contact: 9915005021, 9988451199
Solution
Mere gradual phasing is not considered as discontinuing operation as defined under para 3 of AS 24,
‘Discontinuing Operation’.
Examples of activities that do not necessarily satisfy criterion of the definition, but that might do so in
combination with other circumstances, include:
1) Gradual or evolutionary phasing out of a product line or class of service.
2) Shifting of some production or marketing activities for a particular line of business from one location
to another and
3) Closing of a facility to achieve productivity improvements or other cost savings.
A Reportable business segment or geographical segment as defined in AS 17, would normally satisfy
criteria (b) of the definition.

In view of the above the answers are:

a) No. The companys’ strategic plan has no final approval from the board through a resolution and no
specific time bound activities like shifting of Assets and employees and above all the new segment
commercial vehicle production line and factory has started.
b) No. The resolution is silent about stoppage of the Car segment in definite time period. Though, some
assets sales and transfer proposal was passed through a resolution to the new factory, closure road
map and new segment starting road map is missing. Hence, AS-24 will not be applicable.
c) Yes. Phased and time bound programme resolved in the board clearly indicates the closure of the
passenger car segment in a definite time frame and clear road map.
Hence, this action will attract AS-24 compliance.

Copyright of these notes is with CA. Nitin Goel (IQ Education Worldwide). Contact: 9915005021, 9988451199