CA Intermediate · Advanced Accounting

AS 24 Discontinuing Operations: formula sheet

Full chapter guide

Key formulas

Definition of discontinuing operation: Discontinuing operation = component that (a) pursuant to a single plan is disposed of substantially in its entirety or piecemeal, or is abandoned, (b) is a separate major line of business or geographical area, and (c) is distinguishable operationally and financially; All three conditions must be met. Missing any one means it is not a discontinuing operation.
Initial disclosure event: Initial disclosure event = earlier of (i) binding sale agreement for substantially all the assets, or (ii) board-approved and announced detailed formal plan; Disclosure under AS 24 starts from this date, which may fall in an earlier period than the actual disposal.
Scope of AS 24: AS 24 = presentation and disclosure only; no recognition or measurement rules; Use AS 28, AS 29 and other standards for measuring impairment, provisions and gains or losses.
Ways of discontinuance: Under a single plan: disposal substantially in its entirety (sale in a single transaction, demerger or spin-off), piecemeal disposal, or abandonment; Abandonment means the operation is terminated, not merely put on hold.
Separability test: Assets, liabilities, revenue, expenses and cash flows of the component are separately identifiable; Ties to the business or geographical segment identification used in AS 17.
Initial disclosure event: Earlier of (binding sale agreement) or (board-approved detailed formal plan AND either announcement of main features to those affected or commencement of implementation); Disclosure obligations under AS 24 begin at this date, in the period in which it occurs.
Definition test: component: Single plan + substantially entire disposal or abandonment + separate major line of business or geographical area + assets, liabilities, revenue, expenses and cash flows distinguishable physically, operationally and for financial reporting; All conditions must be met. Failing any one means it is not a discontinuing operation.
Binding sale agreement: Binding sale agreement to transfer substantially all assets of the component; Treat it as an agreement that commits the parties. A letter of intent, MOU or non-binding offer does not qualify.
Detailed formal plan: illustrative content: Detailed formal plan approved by board, and either announced to those affected or implementation commenced; Illustrative only, not an AS 24 requirement: a detailed formal plan might identify the major assets to be disposed of, the expected disposal date, the principal locations affected and employee termination details.
Disclosure 1: ordinary activities: Pre-tax profit or loss of the discontinuing operation = Revenue of the operation − Expenses of the operation (ordinary activities); Show it with the income tax expense related to it. Do not mix it with the disposal gain or loss.
Disclosure 2: disposal or settlement: Pre-tax gain or loss on disposal = Net sale proceeds − Carrying amount of net assets disposed (after any impairment loss already recognised); Show it with the related tax expense. If there is a gain, it is a gain; if proceeds are lower, it is a loss.
Required descriptive disclosures: Description of the operation + segment + date and nature of the initial disclosure event + timing of expected completion + carrying amounts of total assets and total liabilities to be disposed of; These are required disclosures under AS 24, not optional extras. Add them to the amounts in Disclosures 1 and 2.
Measurement rule: Recognition and measurement of a discontinuing operation's items = As per the relevant AS (AS 2, AS 28, AS 29 etc.); AS 24 adds no new valuation rule. It decides what to disclose, not how to value.
Timing rule: Separate disclosure starts at the initial disclosure event and continues until the discontinuance is completed; The event is the earlier of a binding sale agreement for substantially all the assets attributable to the discontinuing operation, or the board of directors or similar governing body having both approved and announced a detailed formal plan.
Net result of the operation: Net effect on profit after tax = (Operating result after tax) + (Disposal result after tax); A tax expense reduces a profit or gain. A tax saving reduces a loss. Use this only as a cross-check, because the two parts must be disclosed separately.
Definition test (all must be met): Component + single plan of disposal or abandonment + separate major line of business or geographical area + distinguishable operationally and for financial reporting; If any one condition fails, AS 24 disclosures are not triggered.
Initial disclosure event: Earlier of (binding sale agreement for substantially all assets) and (board approves detailed formal plan AND announces it); Disclosures start in the financial statements of the period in which this event occurs.
Core disclosure list: Description; segment; date and nature of event; expected completion; carrying amounts of assets and liabilities; revenue, expenses, pre-tax result and tax; gain or loss on disposal and tax; net cash flows; Learn it as D-S-D-D-C-R-T-C. The pre-tax gain or loss on disposal and the related tax must be shown on the face of the statement of profit and loss. The other disclosures may be given in the notes or on the face.
Duration of disclosures: From the period of the initial disclosure event up to and including the period in which the discontinuance is completed; Completion means the plan is substantially complete or abandoned, even if some payments from buyers are still pending.
Comparatives: Prior period figures restated to separate continuing and discontinuing operations, in the same manner as the current period; Total profit is unchanged. Only the split changes.
Offsetting: Assets and liabilities of the discontinuing operation are not netted off; Show total assets to be disposed of and total liabilities to be settled separately.

Quick revision

A discontinuing operation is a component that is being disposed of under a single plan and is a separate major line of business or geographical area.
The component must be distinguishable operationally and for financial reporting purposes.
Disposal routes: disposal substantially in its entirety (for example a single sale, or a demerger or spin-off to shareholders), piecemeal sale, or abandonment.
Gradual phasing out, shifting products or services to another location, selling a subsidiary whose activities are similar to the parent's, or closing a facility to achieve productivity improvements or cost savings is not by itself a discontinuing operation.
The initial disclosure event is the earlier of a binding sale agreement for substantially all the assets, or board approval of a detailed formal plan plus its announcement.
A plan that is only approved but not announced does not trigger AS 24 on its own.
AS 24 does not prescribe separate recognition and measurement principles; it uses those of other standards such as AS 28 (impairment) and AS 29 (provisions). AS 4 is relevant only for events after the balance sheet date. AS 24 itself prescribes the initial disclosure event, presentation and disclosure.
Disclosure starts with the financial statements for the period in which the initial disclosure event occurs.
Disclose carrying amounts of assets to be disposed of and liabilities to be settled at the balance sheet date.
Disclose revenue, expenses, pre-tax profit or loss, related tax, and net operating, investing and financing cash flows of the operation.
Disclose the pre-tax gain or loss on disposal of assets or settlement of liabilities, with the related tax.
Restate comparatives presented in the statements for the period of the initial disclosure event and in later periods, to separate continuing and discontinuing operations, and keep disclosing until the discontinuance is complete.

Common mistakes

Treating any closure of a product or small unit as a discontinuing operation. Fix: Always test all three conditions and check that the component is major and separable.
Taking the actual date of sale as the initial disclosure event. Fix: Use the earlier of the binding sale agreement or the board's approved and announced detailed plan.
Treating board approval alone as the initial disclosure event. Fix: Check both: the plan is detailed, formal and approved by the board, and its main features have been announced to those affected or implementation has begun. Otherwise wait for a binding sale agreement, or for a board-approved detailed plan that has been announced or has begun implementation.
Treating a letter of intent or MOU as a binding sale agreement. Fix: Look for a legally enforceable agreement to transfer substantially all the assets of the operation. If the question says non-binding, or subject to conditions outside the seller's control, do not treat it as the trigger.
Believing AS 24 gives its own valuation rules for assets of the discontinuing operation. Fix: Remember that AS 24 only adds presentation and disclosure. Cite AS 2, AS 28 or AS 29 for measurement.
Combining operating profit and disposal gain into one figure. Fix: Show the two amounts and their taxes separately. A combined total can be an extra line, never a replacement.
Treating board approval of a plan as the initial disclosure event. Fix: Write both limbs. The event is the earlier of a binding sale agreement and board approval plus announcement.
Leaving prior year figures as originally reported. Fix: Restate the comparatives to separate continuing and discontinuing operations. Total profit stays the same.

Exam tips

In theory questions, write the three conditions as a numbered list and apply each fact to them. This is how step marks are awarded.
For a date question, state both candidate events with dates, then pick the earlier. Examiners look for the comparison.
Remember AS 24 is a disclosure standard. If a question asks for the measurement of loss, point to other standards.
In MCQs, watch for options that sound right but drop one of the three conditions, such as ignoring separability.
Always write the date of the initial disclosure event and the financial year it falls in. Marks are often given for the date.
Underline words such as 'non-binding', 'letter of intent', 'approved but not announced' in the question. They usually signal a trap, unless implementation has already started.
When a question mixes sale and closure, state that both sale and abandonment can qualify.
For MCQs, if a scenario fails the major line or geographical area test, pick the option saying it is not a discontinuing operation.