This Comment Letter was sent by BDO Global Coordination B.V. on behalf of BDO International, to the International Accounting Standards Board in January, 2009:
Dear Sir
Exposure Draft Discontinued Operations – Proposed Amendments to IFRS 5
We are pleased to have the opportunity to comment on the above Exposure Draft issued by the International Accounting Standards Board (IASB), on behalf of BDO International1.
Although we are supportive of the convergence of IASB and FASB standards, we do not agree with the following significant proposals in the ED:
a discontinued operation can only exist if an entity disposes of or classifies as held for sale an operating segment; and
disclosure requirements that information about components of the reporting entity that have been either disposed of or are classified as held for sale should be provided in the notes to the financial statements, regardless of whether those components are a discontinued operation as defined.
We believe that the proposals are undesirable, as they could result in an entity disposing of strategically important parts of its business without these being reported as being discontinued operations. We note the paragraph BC7 seeks to justify the exclusion of a definition that includes ‘a separate major line of business’ due to the subjectivity that this brings. We do not believe that this is appropriate, and note that it is contrary to the IASB’s desire, which we support, to develop and issue principles based standards which, by their nature, will involve a degree of judgement and subjectivity.
Our specific responses to your questions are set out below.
Question 1 – Definition of discontinued operations
Question 1(a)
Do you agree with the proposed definition? Why or why not? If not, what definition would you propose, and why?
We do not agree with the proposed definition of ‘discontinued operation’, because it excludes certain significant discontinued activities. In consequence, we do not agree that a discontinued operation can only exist if an entity disposes of or classifies as held for sale an operating segment.
We believe that the disposal or classification as held for sale of a component or part of an operating segment could be significant to the entity especially if it represents a major line of business or geographical area even though that major line of business or geographical area is not identified as a separate operating segment. IFRS 8 Operating Segments paragraph 10 states that:
“The characteristics in [IFRS 8] paragraph 5 may apply to two or more overlapping sets of components for which managers are held responsible. That structure is sometimes referred to as a matrix form of organisation. For example, in some entities, some managers are responsible for different product and service lines worldwide, whereas other managers are responsible for specific geographical areas. The chief operating decision maker regularly reviews the operating results of both sets of components, and financial information is available for both. In that situation, the entity shall determine which set of components constitutes the operating segments by reference to the core principle”.
However, we believe that the selection of, for example, product and service lines for disclosures in terms of IFRS 8 should not exclude the disposal or classification as held for sale of a specific geographical area from the definition of ‘discontinued operations’ in terms of IFRS 5. We are also of the view that the disposal or classification as held for sale of a component or part of an operating segment could in certain situation also be classified as a strategic shift in the operations of an entity. As examples: | - |
an entity might discontinue a significant portion of an operating segment by selling or closing activities that represent 80 % of its largest operating segment. |
| - |
an entity might determine its segments by reference to business activities and not geographic areas. One of its segments might be engine manufacture, with operations in the US and Europe, both of which represent significant proportions of the overall business activities. The entity might decide to close its US operations. |
In our view, to establish a rule that an item can only be classified as a discontinued operation if it is an operating segment is contrary to the principle of reporting separately an entity’s continuing and discontinued operations.We therefore suggest that the definition of a discontinued operation is modified to be;A discontinued operation is a component of an entity that either has been
disposed of, or is classified as held for sale, and:
(a) is an operating segment, or
(b) represents a separate major line of business or geographical area of operations, or
(c) is a business that meets the criteria to be classified as held for sale
on acquisition
The standard should then outline the principle in respect of the “significant” and the needs of the users of the financial report for this information.
We assume that the reference to operating segments refers to operating segments as defined in terms of IFRS 8 paragraphs 5 to 10 before aggregation into reportable segments. It would be helpful to clarify whether the reference to operating segments refers to operating segments before or after aggregating in terms of IFRS 8 paragraph 12. Question 1(b)If an entity is not required to apply IFRS 8, is it feasible for the entity to determine whether the component of an entity meets the definition of an operating segment? Why or why not? If not, what definition would you propose for an entity that is not required to apply IFRS 8, and why?We consider that it is feasible for an entity that prepares consolidated financial statements to determine whether the component of an entity meets the definition of an operating segment, because it is already required by IAS 36.80 to determine that a cash generating unit is not larger than an ‘operating segment’ as defined in IFRS 8 for the purposes of impairment testing of goodwill acquired in a business combination.For ‘stand alone’ entities we do not consider that it would normally be onerous to determine whether a component meets the definition of an operating segment. However, in order to cate for entities that might find this determination difficult, our suggested revised definition set out might be modified such that those entities would only consider whether a component that had been disposed of met the conditions in either subparagraph b) or c).Question 2 – Amounts presented for discontinued operations Do you agree that the amounts presented for discontinued operations should be based on the amounts presented in the statement of comprehensive income? Why or why not? If not, what amounts should be presented, and why?
We agree that the amounts presented for discontinued operations should be based on the amounts presented in the statement of comprehensive income.
Question 3 – Disclosures for all components of an entity that have been disposed of or are classified as held for sale
Question 3(a)
Do you agree with the proposed disclosure requirements? Why or why not? If not, what changes would you propose, and why?
We do not agree with the proposed disclosure requirements in paragraph 41A, which appears to have been included to compensate for the restrictive proposed definition of a discontinued operation. As noted above, we disagree with the proposed definition, and believe that a wider definition which takes into account the significance of the operations which have been disposed of would be appropriate. Detailed note disclosures should then be required only for those operations which are disclosed on the face of the primary statements as being discontinued operations.
We note that paragraph 41A refers to a ‘component of an entity’ without further qualifying this by reference to the significance of that component. In consequence, it would appear that the proposed disclosure requirements could apply to very small components. We do not believe that detailed information for these small components, as envisaged by paragraph 41A, would necessarily be useful to users of financial statements.
Question 3(b)
Do you agree with the disclosure exemptions for businesses that meet the criteria to be classified as held for sale on acquisition? Why or why not? If not, what changes would you propose, and why?
We agree with the disclosure exemptions for businesses that meet the criteria to be classified as held for sale on acquisition, because the objective of IFRS 5 is to provide users with information about components that have been part of the entity’s continuing operations in the past, but either no longer are or are expected not to be shortly.
Question 4 – Effective date and transition
Exposure Draft of Proposed Amendments to Discontinued Operations – Proposed Amendments to IFRS 5, Comments due 23 January 2009:Are the transitional provisions appropriate? Why or why not? If not, what would you propose, and why?We agree with the proposed transitional provisions, with the associated enhanced comparability.We hope that our comments and suggestions are helpful. Should you wish to discuss any of the points we have raised please contact either Helen Thomson at +32 2 778 01 30 or Andrew Buchanan at +44 (0)20 7893 3300.Yours faithfully,BDO Global Coordination B.V.1BDO International is a world wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands, with an office in Brussels, Belgium, where the International Executive Office is located.
Exposure Draft of Proposed Amendments to Discontinued Operations –
Proposed Amendments to IFRS 5, Comments due 23 January 2009:
ED Discontinued Operations - Proposed amendments to IFRS 5.pdf