DISCONTINUED OPERATIONS

BACKGROUND

Ind AS 105 Non-current
assets held for sale and discontinued operations requires discontinued
operations to be presented separately in the profit and loss account, so that
the users of financial statements can separate the profits or losses from
continuing and discontinued operations. Such a segregated presentation helps
users of financial statements to determine the maintainable profits or losses
that arise from continuing operations.

Ind AS 105 (paragraph 32) defines
a discontinued operation 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,

(b)  is part of a single co-ordinated 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.

Paragraph 33 of Ind AS 105
requires an entity to disclose:

(a)   a single amount in the statement of profit and loss comprising the
total of:

(i)    the post-tax profit or loss of discontinued operations; and

(ii)   the post-tax gain or loss recognised on the measurement to fair
value less costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation.

(b)   an analysis of the single amount in (a) into:

(i)    the revenue, expenses and pre-tax profit or loss of discontinued
operations;

(ii)   the related income tax expense;

(iii) the gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation; and

(iv) the related income tax expense.

A common question that is
generally raised is with respect to a parent transferring an operation to a
subsidiary and whether in the parent’s separate financial statements the
disposal of the operation will be presented as a discontinuing operation. In
the consolidated financial statements, since the business remains within the
group, there is no discontinued operation which is required to be presented separately. Consider the detailed fact pattern below:

FACT PATTERN

A Ltd. (‘the Company’ or ‘the
parent’) enters into an arrangement whereby it will transfer an operation that
qualifies as an operation (as defined earlier) under Ind AS 105 to a
newly-set-up company (NewCo). The transfer is a slump sale and is set out in a
Business Transfer Agreement (BTA). NewCo is a wholly-owned subsidiary of the
company when it is set up.

The transfer is done with a
pre-requisite that an investor will concurrently invest in NewCo. to the extent
of 30%. The company has not lost control due to the said infusion, because it
still holds majority (70%) ownership. The investor will have significant
influence over NewCo.

There is no impairment on the
assets transferred.

Should the transferred operation
be classified as discontinued operations in the Separate Financial Statements
of A Ltd.?

ANALYSIS

There is no guidance with respect
to this specific issue either under Ind AS 105 or other Ind AS’s. In the stated
fact pattern, there are two possible views for the classification of the
transferred operation.

View 1: The
transferred operation is a discontinued operation in the parent’s separate
financial statements

In the fact pattern, an investor
will be investing to the extent of 30% shareholding in NewCo. There will be no
loss of control for the parent, because the parent still owns a majority stake
in NewCo. Nonetheless, running the operations by the company on its own as
against transferring it to a subsidiary, in which a potential investor has
significant influence, are two different things. Essentially, in the separate
financial statements of the parent the business is getting converted into an
investment in a subsidiary in which an independent investor will play a
significant role.

Earlier, the parent was running
the operations. After the transfer, the parent will have to manage the
investment in the subsidiary. The relevant decisions at the separate financial
statement level will be whether to retain the investment or dispose of the
investment, whether the investment should be further diluted, the proposal with
respect to dividends, etc. The parent and the subsidiary are two separate
entities with independent boards and subjected to a regulatory framework. This
suggests that the appropriate classification of the transferred operation
should be discontinued operation.

Accordingly, the transferred
operations should be classified as a discontinued operation.

View 2: The
transferred operation is not a discontinued operation in the parent’s separate
financial statements

The transfer
of operations to NewCo is simply a change in the geography of the operations,
because the operations continue to remain with the group. The transferred
operations are still controlled by A Ltd. In substance, A Ltd. continues to
control the operations though there will be significant influence exercised by
the independent investor in NewCo. There is a very thin line between managing
the investment in a subsidiary vs. running the operations represented by that
investment. Consequently, the transferred operations are not discontinued
operations in the separate financial statements of the parent.