Financial Accounting Theory and Analysis

Text and Cases

Fourteenth Edition
Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey

Chapter 6

Financial Statement I: The Income Statement

Introduction
• The financial reporting environment in the United States consists of various
groups that are affected by and have a stake in the financial reporting
requirements
• Investors in equity securities are the central focus of the financial reporting
environment
• Investment involves giving up current resources for future, uncertain
resources
o Investors require information that will help them assess future cash flows from
securities

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The Economic Consequences of Financial Reporting
• Financial information can affect the distribution of wealth
among investors
o More informed investors, or investors employing security analysts,
may be able to increase their wealth at the expense of less informed investors
• Financial information can affect the level of risk accepted by a firm
o Focusing on short-term, less risky, projects may have long-term detrimental effects
• Financial information can affect the rate of capital formation in the
economy
o This can result in a reallocation of wealth between consumption and investment
within the economy
• Financial information can affect how investment is allocated among firms
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Income Statement Elements
• SFAC No. 8 indicates that the primary focus of financial reporting is to
provide information about a company’s performance
• Vehicle for relaying performance assessments to investors
• SFAC No. 6: defined the elements of the income statement

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Financial Statement Elements as Defined in SFAC No. 6
Revenues Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a
combination of both) during a period from delivering or producing goods, rendering
services, or other activities that constitute the entity’s ongoing major or central
operations
Gains Increases in net assets from peripheral or incidental transactions of an entity and from
all other transactions and other events and circumstances affecting the entity during a
period except those that result from revenues or investments by owners
Expenses Outflows or other using up of assets or incurrences of liabilities (or a combination of
both) during a period from delivering or producing goods, rendering services, or carrying
out other activities that constitute the entity’s ongoing major or central operations
Losses Decreases in net assets from peripheral or incidental transactions of an entity and from
all other transactions and other events and circumstances affecting the entity during a
period except from expenses or distributions to owners

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Differences between Changes in Assets/Liabilities and
Inflows/Outflows Definitions of Income Stress inflow, outflow, realization and matching concept BY
(APB)

The changes in assets and/or liabilities The inflows and outflows definition views
approach determine earnings as a measure income as a measure of effectiveness
of the change in net economic resources for
a period
The changes in assets and/or liabilities The inflows and outflows approach depends
approach depend on the definition of assets on definitions of revenues and expenses and
and liabilities to define earnings matching them to determine income
The inflows and outflows approach results The changes in assets and/or liabilities
in the creation of deferred charges, approach recognize deferred items only
deferred credits, and reserves when when they are economic resources or
measuring periodic income obligations

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Differences Continued
• Both approaches agree that because investors look to financial statements
to provide information from which they can extrapolate future resource
flows
o The income statement is more useful to investors than is the balance sheet
• The changes in assets and/or liabilities approach limits the population from
which the elements of financial statements can be selected to net
economic resources and to the transactions and events that change
measurable attributes of those net resources
• Under the inflows and outflows approach, revenues and expenses may
include items necessary to match costs with revenues, even if they do not
represent changes in net resources
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Statement Format
• Proponents of the current operating performance concept believe that only
changes and events controllable by management that result from current-
period decisions should be included in income
o Normal and recurring items, termed sustainable income, should constitute the
principal measure of enterprise performance (Continuous)
• Advocates of the all-inclusive concept of income hold that net income
should reflect all items that affected the net increase or decrease in
stockholders’ equity during the period
o Except capital transactions

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APB Opinion No. 9
Revenues
Less: Cost of goods sold
= Gross profit
Less: Administrative and selling expenses
Plus: Other gains
Less: Other losses
= Income from continuing operations
Discontinued operations
Extraordinary items
Change in accounting principle
= Net income
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Income From Continuing Operations
• Normal and recurring revenues and expenses
o Sustainable income
o Income tax (recurring items)
• Nonrecurring items (Each net of their tax effect)
o Discontinued operations
o Extraordinary items
o Change in accounting principle

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Nonrecurring Items of Income
1. Discontinued operations
2. Accounting changes

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Discontinued Operations
• Why special treatment?
• Arise from a disposal of a component of a business
o Comprised of operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity
• Original criteria contained in APB Opinion No. 30
o Required separate presentation of (1) the results of operations of the disposed
segment; and (2) gain or loss on the sale of assets for disposed segments including
any operating gains or losses during the disposal period
o Time of disclosure was determined by whether a gain or loss was expected on the
measurement date
• Amended by SFAS 144
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SFAS No. 144 FASB ASC 360 (held for sale)
• Changed reporting of discontinued operations:
• Unit must qualify as a component
o Distinguishable assets and cash flows
• If so two criteria shall be met:
o Operations and cash flows of component must be eliminated as a result of the
transaction
o Company does not retain any significant involvement in operations of component
after disposal
• Neither Hershey or Tootsie Roll disclosed any discontinued operations

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Reporting Discontinued Operations
• On February 3, 2010, the boards decided that discontinued operations
should continue to be presented in a separate section
• A discontinued operation is a component that has either been disposed of
or is classified as held for sale, and
a. Represents a separate major line of business or major geographical area of
operations
b. Is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations, or
c. Is a business that meets the criteria in paragraph 360-10-45-9 to be classified as
held for sale on acquisition

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Disclosure
a. The major income and expense items constituting the profit or loss from a
discontinued operation
b. The major classes of cash flows of the discontinued operation
c. The profit or loss attributable to the parent if the discontinued operation
includes a noncontrolling interest
d. A reconciliation of the major classes of assets and liabilities of the
discontinued operation
e. A reconciliation of the major income and expense items from the
discontinued operation

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Discontinued Operations FAS 2013-46
ASU criticize that many dispositions met the pervious criteria so costly to prepare) such as real estates

• The FASB issued (Accounting Standards Updates) ASU 2014-08 which changed the criteria for
determining disposals to be presented as discontinued operations
• New definition of a discontinued operation is a component or group of components that has
been disposed of or is classified as held for sale, together as a group in a single transaction, and
represents a strategic shift that has a major effect on an entity's financial results as determined
by:
o Meets the criteria to be classified as held for sale;
o Is disposed of by sale; or
o Is disposed of other than by sale
• Decisions:
o Has a strategic shift occurred?
Shall be placed on the most recently completed current and next annual reporting period.
o Will it have an impact
o Possible metrics
• Higher threshold for recognition results in additional disclosures
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Examples of Strategic Shifts
1. The sale of a product line that represents 15% of an entity’s total revenues
2. The sale of a geographical area that represents 20% of an entity’s total
assets
3. The sale of all of an entity’s stores in one of its two types of store formats
that historically provided 30–40% of an entity’s net income and 15% of
current period net income
4. The sale of a component that is an equity method investment that
represents 20% of the entity’s total assets
5. The sale of 80% of a product line that accounts for 40% of total revenue,
but the seller retains 20% of its ownership interest
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Expanded Disclosure for Discontinued Operations
i. Pretax profit or loss of the discontinued operation
ii. Major line items constituting pretax profit or loss
iii. If the discontinued operation includes a noncontrolling interest, the
pretax profit or loss attributable to the parent
iv. Either total operating and total investing cash flows or depreciation,
amortization, capital expenditures, and significant noncash operating and
investing items

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Consistent with Current Guidelines, Must Disclose
i. The facts and circumstances leading to the disposal or expected disposal
ii. The expected manner and timing of the disposal
iii. The gain or loss recognized (if not presented separately on the face of the
statement where net income is reported)
iv. The segment in which the discontinued operation is reported

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Extraordinary Items
• Prior to 2016, a special category of nonrecurring items termed extraordinary items was
reported on corporate financial statements
• Original definition APB No. 9 – not expected to recur
• Problems – similar items not being classified similarly
• APB Opinion No. 30
o Unusual nature
o Infrequency of occurrence
• Problem:
o Requirements do not always separate recurring and non-recurring items – unusual but not infrequent
o As a result, there is a tendency to increase the variability of operating income and decrease the
predictive ability of earnings
• The events of 9/11
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Extraordinary Items Continued
• The presentation of extraordinary items came under additional review and
on January 9, 2015, the FASB issued Accounting Standards Update (ASU)
2015‐01, Income Statement—Extraordinary and Unusual Items, as a part of
the simplification initiative (discussed later)
• This ASU eliminates the concept of extraordinary items from U.S. GAAP
• It was issued after the FASB heard from stakeholders that the concept of
extraordinary items causes uncertainty (i.e., unclear when an item should
be considered both unusual and infrequent)

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Accounting Changes
• The accounting standard of consistency requires that similar transactions
should be reported similarly each year
• Occasionally an entity may find that reporting needs are better served by
changing a method of accounting
o If so, the comparability of financial statements is impaired
• Basic question: Should previously issued financial statements be amended?

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APB Opinion No. 20 Originally Identified Four Types of Accounting
Changes
1. Change in an accounting principle
o This type of change occurs when an entity adopts a GAAP that differs from one
previously used for reporting purposes
2. Change in an accounting estimate
o These changes result from the necessary consequences of periodic presentation
3. Change in a reporting entity
o Changes of this type are caused by changes in reporting units
4. Errors
o Errors are not viewed as accounting changes
o Rather, they are the result of mistakes or oversights such as the use of incorrect
accounting methods or mathematical miscalculations
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Change in an Accounting Principle (CAP)
• How reported
o APB Opinion No 20 – Catch-up adjustment with 3 exceptions
o SFAS No 154 – Retrospective application
• Change in accounting estimate
o How reported – Prospective application
• Change in accounting entity
o How reported- Retrospective application
• Errors
o How reported–Prior period adjustments

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Earnings per Share
• The calculation and disclosure of earnings per share (EPS) condenses a firm’s
performance into a single figure
o It is a quick and efficient way to compare firms’ performance
• EPS=
• Basic EPS is intended to measure the amount that a share of common stock has
earned during an accounting period
• Basic EPS is historical
• Reporting basic EPS is considered insufficient to meet investor needs
• SFAS No. 128 (see FASB ASC 260),21 which requires that EPS figures for income
from continuing operations and net income be presented on the face of the
income statement
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Reasons for SFAS No. 128 Changes
1. Basic EPS and diluted EPS data would give users the most factually range
of possibilities
2. Use of a common international method is important due to the data
based oriented financial analysis and internationalization of business
3. The notion of common stock equivalents does not operate efficiently in
practice
4. The computation of primary EPS is complex and not well understood or
consistently applied
5. Presenting basic EPS eliminates criticism about the arbitrary nature of the
determination of common stock equivalents
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SFAS No. 128
• Requires presentation of EPS by all publicly traded companies issuing
common stock
• Companies with a simple capital structure will only report basic earnings
per share
• All others will report basic and diluted

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Diluted EPS
• Objective
o Historical - basic
o Pro forma - diluted
• Calculation:
• Includes all potential dilutive securities
1. Options and warrants - treasury stock method
2. Written put options – reverse treasury stock method
3. Convertible securities “as-if-converted”
4. Contingently issuable securities

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Dilutive Securities
• Call options and warrants give the holder the right to purchase shares of
the company’s stock for a predetermined option (exercise or strike) price
• Written put options and forward purchase contracts require the reporting
entity to repurchase shares of its own stock at a predetermined price
o These securities are dilutive when the exercise price is above the average market
price during the period
• Convertible securities are securities (usually bonds or preferred stock) that
are convertible into other securities (usually common stock) at a
predetermined exchange rate
• Contingently issuable shares are shares whose issuance is contingent on
the satisfaction of certain conditions
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Usefulness of Earnings per Share
• Objectives of EPS reporting are to provide investors an indication of:
1. Value of the firm
2. Expected future dividends
• Question: Historical or forecasted?
• Summary indicator
• Hershey has a complex capital structure and discloses basic as well as
diluted earnings per share on its income statements
• Tootsie Roll has a simple capital structures and discloses only one earnings
per share figure

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Examples of Items Currently not Disclosed on the Traditional
Income Statement
1. Foreign currency translation adjustments
2. Gains and losses on foreign currency transactions that are designated as,
and effective as, economic hedges of a net investment in a foreign entity
3. Gains and losses on intercompany foreign currency transactions that are
categorized as long-term investments
4. A change in the market value of a futures contract that qualifies as a
hedge of an asset reported at fair value
5. The excess of the additional pension liability over unrecognized prior
service cost

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Reasons for SFAS No 130 - Reporting Comprehensive Income
Project
1. Off-balance sheet financing
2. The practice of reporting some items of comprehensive income in
stockholders’ equity
3. Acknowledged need for harmonization of accounting standards

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Terms
• Comprehensive income is used to describe the total of all components of
comprehensive income, including net income
• Other comprehensive income (OCI) refers to revenues, expenses, gains, and
losses included in comprehensive income but excluded from net income

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SFAS No 130 – Original Issues
1. Should comprehensive income be reported?
2. Should cumulative accounting adjustments be included in comprehensive
income?
3. How should the components of comprehensive income be classified for
disclosure?
4. How should comprehensive income be disclosed in the financial
statements?
5. Should the components of other comprehensive income be disclosed
before or after their related tax effects?

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Should Cumulative Accounting Adjustments Be Included?
• The main issue was whether the effects of certain accounting adjustments
of earlier periods should be reported as part of comprehensive income
• FASB considered the definition of comprehensive income originally
contained in SFAC No. 5
• The board decided to include cumulative accounting adjustments as part of
comprehensive income
• In 2005, the FASB reversed this decision and now requires retroactive
presentation of the effect of changes in accounting principles

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How Should the Components of Comprehensive Income Be
Classified for Disclosure?
• Requirement:
o Companies must disclose an amount for net income
• That amount must be accorded equal prominence with amount disclosed
for comprehensive income
• The standard does not change the components of net income or their
classifications within the income statement
• Items of other comprehensive income are classified based on their nature

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How Should Comprehensive Income be Disclosed in the Financial
Statements?
• In June 2011, the FASB issued ASU 2011-05, Comprehensive Income,
• Requires a gross disclosure technique for items of other comprehensive
income
• ASU 2011-05 allows for the disclosure of comprehensive income
o On income statement
o On a separate statement
• Previous alternative treatment of disclosure in statement of stockholders’
equity no longer allowed

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Should Components of Other Comprehensive Income Be
Displayed Before or After Their Related Tax Effects?
• Allows the components of other comprehensive income to be disclosed
either
o Net of related tax effects or
o Before related tax effects with one amount shown for the aggregate income tax
expense or benefit related to the total amount of other comprehensive income
• Other comprehensive income is transferred to a separate component of
stockholders’ equity
• Hershey Company discloses changes in OCI in its consolidated statement of
shareholder’s equity as a single net amount and elaborates on the
individual components of this amount in the footnotes
• Tootsie Roll includes the calculation of OCI on its income statement
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Prior Period Adjustments
• Adjustment to beginning the retained earnings balance
• Original criteria in APB No. 9
o Examples: income tax disputes litigation
• SEC Staff Bulletin No. 8 and APB Opinion No. 16
o Correction of an error
o Adjustments from realization of operating loss carryforward of purchased subsidiary

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The Simplification Initiative
• In June 2014, the FASB announced a plan to reduce the complexity of
accounting standards
• Termed the simplification initiative, involves adding narrow-scope projects
to the FASB’s agenda
o Identified by various stakeholders as opportunities to simplify GAAP
o In a relatively short time period
• It should be noted that several of the completed simplification projects
converge with International Financial Reporting Standards (IFRS)

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The Value of Corporate Earnings
• The income statement allows users to evaluate a firm’s current
performance, estimate its future performance, and predict future cash
flows
• For analytical purposes, it is important for users to understand and be able
to identify revenue and expense items that are likely to continue into the
future (sustainable earnings) and those that are not (transitory
components)
• For this reason, the distinction between operating and nonoperating
revenues, expenses, gains, and losses is important

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Financial Analysis of Income Statement Questions
1. What are the company’s major sources of revenue?
2. What is the persistence of a company’s revenues?
3. What is the company’s gross profit ratio?
4. What is the company’s operating profit margin?
5. What is the relationship between earnings and the market price of the
company’s stock?

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Sources of Revenue
• Many of the largest corporations are highly diversified, which means that they sell a variety of
products
• Each of these products has an individual rate of profitability, expected growth pattern, and
degree of risk
• One measure of the degree of risk is a company’s reliance on major customers
• The financial analysis of a diversified company requires a review of the impact of various
business segments on the company as a whole
• Both Hershey reports segmental information for two segments:
1. Domestic
2. International
• Tootsie Roll reports segmental information for two segments:
1. United States
2. Foreign
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Persistence of Revenues
2020 2019 2018 2017 2016
• The persistence of a company’s
Hershey Co. 1.095 1.073 1.047 1.010 1.000
revenues can be assessed by
Tootsie Roll 0.894 1.016 0.999 0.997 1.000
analyzing the trend of its
revenues over time
• Also, by reviewing
Management’s Discussion and
Analysis (MD&A)

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Management’s Discussion and Analysis (MD&A)
• The MD&A section of a company’s annual report can provide valuable
information on the persistence of a company’s earnings and its related
costs
• The SEC requires companies to disclose any changes or potential changes in
revenues and expenses to assist in the evaluation of period-to-period
deviations
• Hershey indicated that net sales increased 1.0% in 2017 compared with
2016

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Gross Profit Analysis
• The analysis of a company’s gross profit focuses on explaining variations in
sales, cost of goods sold, and their effect on gross profit
• This analysis can be enhanced by separating it into product lines

• One popular method of analysis compares a company’s ratios with industry

averages
• Industry averages are available from several sources,
• such as Standard & Poor’s Industry Surveys or Reuters Investor

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Net Profit Analysis
• A company’s net profit percentage, an indicator of the effectiveness of its
overall performance

• The industry average for this metric is approximately 12.4%

• Some analysts compute the operating profit percentage
o Also termed earnings before interest and taxes, or EBIT

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Price-to-Earnings Ratio
• One measure that has been found useful in assessing the relationship
between corporate earnings and a company’s stock prices is a company’s
price-to-earnings ratio (P/E ratio

• This ratio provides an earnings multiple at which a company’s stock is

currently trading
• A firm’s beta (β) or earnings volatility affects its stock price
• In other words, all things being equal, a firm that reports only income from
continuing operations will usually be valued more highly than a firm that
reports one or more of the other components of income
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International Accounting Standards
1. Defined the concepts of performance and income in “Framework for the
Preparation and Presentation of Financial Statements”
2. Discussed the content and format of the income statement in IAS No. 1, “
Presentation of financial Statements”
3. Discussed some components of the income statement in an amended IAS
No. 8, now titled "Accounting Policies, Changes in Accounting Estimates and
Errors"
4. Amended IAS No. 33
5. Discussed the required presentation and disclosure of a discontinued
operation in IFRS No. 5, “Non-Current Assets Held for Sale and Discontinued
Operations”
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Framework for the Preparation and Presentation of Financial
Statements
• Profit is used
o To measure performance; or
o As the basis for other measures
• The IASB definition of income encompasses both revenue and expenses
• Measurement of income is dependent on the concept of capital
maintenance employed
o Physical capital maintenance
o Financial capital maintenance

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IAS No. 1, “Presentation of Financial Statements”
• Objective: to prescribe the basis for presentation of general‐purpose
financial statements, to ensure comparability both with the entity’s
financial statements of previous periods and with the financial statements
of other entities
• Requires an income statement and a statement of comprehensive income
(separate or combined)
• An entity has the choice of presenting a single statement of comprehensive
income or two statements
1. An income statement displaying components of profit or loss
2. A statement of comprehensive income that begins with profit or loss and displays
components of OCI
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IAS No. 1 Requirements
• Revenue
• Finance costs
• Share of the profit or loss of associates and joint ventures accounted for using the
equity method
• Tax expense
• Discontinued operations including:
o Gain or loss on operations
o Gain or loss on disposal of asset
• Profit or loss, each component of OCI classified by nature,
• Share of the OCI of associates and joint ventures accounted for using the equity method
• Total comprehensive income
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2014 Amendment to IAS No. 1
• Materiality
a. Information should not be obscured
b. Materiality considerations apply to the all parts of the financial statements
c. If a standard requires a specific disclosure, materiality considerations do apply
• Statement of financial position and statement of profit or loss and other
comprehensive income
a. Items in these statements can be disaggregated and aggregated as relevant
b. An entity’s share of OCI of equity-accounted associates and joint ventures should be presented in
aggregate as single line items
• Notes
a. Possible ways of ordering the notes to clarify that understandability and comparability should be
considered
b. The board had removed guidance and examples
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IAS N0. 8
• Goal of IAS No. 8: to prescribe the classification, disclosure and accounting
treatment of certain items in the income statement so that all entities
prepare and present their income statements in a consistent manner
• When a standard or an interpretation specifically applies to a transaction, it
must be followed
• In the absence of a standard or an interpretation that specifically applies to
a transaction, judgment should be used

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IAS No. 8 Judgment Guidelines
1. The requirements and guidance in IASB standards and interpretations
dealing with similar and related issues
2. The definitions, recognition criteria, and measurement concepts for
assets, liabilities, income, and expenses in the Framework for the
Presentation of Financial Statements
3. The most recent pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop accounting standards
4. Other accounting literature and accepted industry practices, to the extent
that these do not conflict with the sources in paragraph three

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IAS No. 8: Accounting Policies, Changes in Accounting Estimates
and Errors
• Companies are required to select and apply accounting policies on a consistent
basis for similar transactions
• A company may change an adopted accounting policy only if the change either
1. Is required by a standard or interpretation, or
2. Results in the financial statements providing reliable and more relevant information about
the effects of transactions, other events, or conditions on the entity’s financial position,
financial performance, or cash flows
• If a change in accounting policy is required by a new IASB pronouncement, the
change should be accounted for by the requirements of the new pronouncement
• However, if the new pronouncement does not include specific transition
provisions, then the change in accounting policy is applied retroactively

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IAS No. 8 Errors
• Now defined as newly discovered omissions or misstatements of prior
period financial statements based on information that was available when
the prior financial statements were prepared
• All material errors will be accounted for retrospectively
o By restating all prior periods presented
o And adjusting the opening balance of retained earnings of the earliest prior period
presented
o Cumulative effect recognition in income is prohibited

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IAS No. 33, “Earnings Per Share”
• Objective: to prescribe principles for determining and presenting EPS
amounts to improve performance comparisons between different entities
in the same reporting period and between different reporting periods for
the same entity
• Applies to entities whose securities are publicly traded or that are in the
process of issuing securities to the public.
• IAS No 33 is fully convergent with SFAS No 15 discussed earlier

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IAS No. 33 Disclosures and Guidelines
1. Basic and diluted EPS must be presented for (a) profit or loss from
continuing operations and for (b) net profit or loss, on the face of the
income statement for each class of ordinary shares, for each period
presented
2. Potential ordinary shares are dilutive only when their conversion to
ordinary shares would decrease EPS from continuing operations
3. Contracts that may be settled in cash or shares include a rebuttable
presumption that the contract will be settled in shares

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IAS No. 33 Disclosures and Guidelines Continued
4. If an entity purchases (for cancellation) its own preference shares for
more than their carrying amount, the excess (premium) should be treated
as a preferred dividend in calculating basic EPS (deducted from the
numerator of the EPS computation)
5. Guidance is provided on how to calculate the effects of contingently
issuable shares; potential ordinary shares of subsidiaries, joint ventures or
associates; participating securities; written put options; and purchased
put and call options

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IFRS No. 5, “Noncurrent Assets Held for Sale and Discontinued
Operations”
• SFRS No. 5 replaces IAS No. 35
• Outlines the accounting treatment for noncurrent assets held for sale (or
for distribution to owners).
• Assets held for sale are not depreciated,
o Measured at the lower of carrying amount and fair value less costs to sell,
o Presented separately in the balance sheet

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Conditions for an Asset to be Classified as Held for Sale
• Management is committed to a plan to sell the asset or group
• The asset or group is available for immediate sale
• An active program to locate a buyer has been initiated
• The sale is highly probable, within 12 months of classification as held for
sale
• The asset or group is being actively marketed for sale at a sales price
reasonable in relation to its fair value
• Actions required to complete the plan indicate that it is unlikely that plan
will be significantly changed or withdrawn

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IFRS No. 5 Disclosures Regarding Assets Held for Sale
• A description of the noncurrent asset or disposal group
• A description of facts and circumstances of the sale (disposal) and the
expected timing
• A description of impairment losses and reversals, if any, and where in the
statement of comprehensive income they are recognized
• A description of if applicable, the reportable segment in which the
noncurrent asset (or disposal group) is presented in accordance with IFRS
No. 8 “Operating Segments”

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Classified as a Discontinued Operation
• Under US GAAP, a component can only be classified as a discontinued
operation if it has been disposed of or is classified as held for sale and
1. The operations and cash flows of the component have been (or will be) eliminated from
the ongoing operations of the entity as a result of the disposal transaction and
2. The entity will not have any significant continuing involvement in the operations of the
component after the disposal transaction
• Under IFRS No. 5, the component can only be classified as a discontinued
operation if it has been disposed of or classified as held for sale and
1. It represents a separate major line of business or geographical area of operations; and
2. Is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations; or
3. Is a subsidiary acquired exclusively with a view to resale
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