Topic list Syllabus reference

Required
Show the statement of profit or loss for 20X7, with the 20X6 comparative, and retained earnings.
Answer
STATEMENT OF PROFIT OR LOSS

	20X6 $000	20X7 $'000
Revenue	47,400	67,200
Cost of goods sold (W1)	(38,770)	(51,600)
Profit before tax	8,630	15,600
Income tax (W2)	(2,620)	(4,660)
Profit for the year	6,010	10,940
RETAINED EARNINGS
	20X6	20X7
Opening retained earnings	$'000	$000
As previously reported (13,000 + 8,950) Correction of prior period	13,000	21,950
error (4,200- 1,260)	—	(2,940)
As restated	13,000	19,010
Profit for the year	6,010	10,940
Closing retained earnings	19,010	29,950
Workings
1 Cost of goods sold	20X6	20X7
	$'000	$'000
As stated in question	34,570	55,800
Inventory adjustment	4,200	(4,200)
	38,770	51,600
2 Income tax	20X6	20X7
	$'000	$'000
As stated in question	3,880	3,400
Inventory adjustment (4,200 x 30%)	(1,260)	1,260
	2,620	4,660

Exam focus point

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Key terms
ACCA has a useful technical article on its website regarding the correction of errors, although it focuses mainly on the mechanics of correction, it does raise some useful application points.

4. 
   IFRS 5 Non-current Assets Held for Sale and
   

Discontinued Operations
IFRS 5 requires assets held for sale’ to be presented separately in the statement of financial position. It sets out the criteria for recognising a discontinued operation.

1. 
   Background
   

IFRS 5 requires assets and groups of assets that are held for sale' to be presented separately in the statement of financial position. The results of discontinued operations should be presented separately in the statement of profit or loss and other comprehensive income. This is required so that users of financial statements will be better able to make projections about the financial position, profits and cash flows of the entity.
Disposal group. A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. (In practice a disposal group could be a subsidiary, a cash-generating unit or a single operation within an entity.)
Cash-generating unit. The smallest identifiable group of assets for which independent cash flows can be identified and measured (IFRS 5: App A)
IFRS 5 does not apply to certain assets covered by other accounting standards:

1. 
   Deferred tax assets (IAS 12)
   
2. 
   Assets arising from employee benefits (IAS 19)*
   
3. 
   Financial assets (IFRS 9)
   
4. 
   Investment properties accounted for in accordance with the fair value model (IAS 40)
   
5. 
   Agricultural and biological assets (IAS 41)
   
6. 
   Insurance contracts (IFRS 4)* (IFRS 5: para. 5)
   

* Not covered in Financial Reporting

2. 
   Classification of assets held for sale
   

A non-current asset (or disposal group) should be classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use (IFRS 5: para. 6). A number of detailed criteria must be met:

1. 
   The asset must be available for immediate sale in its present condition.
   
2. 
   
   
   (IFRS 5: para. 7)
   Its sale must be highly probable (ie significantly more likely than not).
   

For the sale to be highly probable, the following must apply:

1. 
   Management must be committed to a plan to sell the asset.
   
2. 
   There must be an active programme to locate a buyer.
   
3. 
   The asset must be marketed for sale at a price that is reasonable in relation to its current fair value.
   
4. 
   The sale should be expected to take place within one year from the date of classification.
   
5. 
   It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
   

(IFRS 5: para. 8)
An asset (or disposal group) can still be classified as held for sale, even if the sale has not actually taken place within one year. Any delay must have been caused by events or circumstances beyond the entity's control and there must be sufficient evidence that the entity is still committed to sell the asset or disposal group. Otherwise the entity must cease to classify the asset as held for sale. (IFRS 5: para. 9)
If an entity acquires a disposal group (eg, a subsidiary) exclusively with a view to its subsequent disposal it can classify the asset as held for sale only if the sale is expected to take place within one year and it is highly probable that all the other criteria will be met within a short time (normally three months).
(IFRS 5: para. 11)
An asset that is to be abandoned should not be classified as held for sale. This is because its carrying amount will be recovered principally through continuing use. However, a disposal group to be abandoned may meet the definition of a discontinued operation and therefore separate disclosure may be required (see below). (IFRS 5: para. 13)


Held for sale
Question
On 1 December 20X3, ManiCo became committed to a plan to sell a manufacturing facility and has already found a potential buyer. ManiCo does not intend to discontinue the operations currently carried out in the facility. At 31 December 20X3 there is a backlog of uncompleted customer orders. The company will not be able to transfer the facility to the buyer until after it ceases to operate the facility and has eliminated the backlog of uncompleted customer orders. This is not expected to occur until spring 20X4.
Required
Can the manufacturing facility be classified as 'held for sale' at 31 December 20X3?
Answer
The facility will not be transferred until the backlog of orders is completed; this demonstrates that the facility is not available for immediate sale in its present condition. The facility cannot be classified as 'held for sale' at 31 December 20X3. It must be treated in the same way as other items of property, plant and equipment: it should continue to be depreciated and should not be separately disclosed.

3.