Understanding Accounting Standard 24: Discontinuing Operations
Accounting Standard 24 (AS-24) outlines the guidelines for accounting and reporting on discontinue operations. This standard is crucial for providing transparent and accurate financial information to stakeholders. By understanding the intricacies of AS-24, businesses can enhance their financial reporting and ensure compliance with regulatory requirements.
Objective and Need for Accounting Standard 24
Traditionally, the profit and loss account of a business provides a general view of the overall financial performance. However, AS-17 allows for the breakdown of this performance into business segments and geographical segments, which is beneficial for detailed analysis. Nonetheless, AS-17 does not address the challenges related to segments that the business intends to discontinue. There is a need for a standard that separates information regarding discontinued operations from continuing operations. This separation is crucial for stakeholders to assess a business's future earning potential and financial standing accurately.
Accounting Standard 24: The Discontinuing Operation
Accounting Standard 24, also designated as AS-24, provides the framework for recognizing, measuring, presenting, and disclosing discontinue operations. A discontinue operation is defined as a distinct component of an entity that is expected to be disposed of or sufficiently dismantled during the normal course of business. This definition is important as it allows for the accurate identification of such operations within a company.
24.1 The Accounting Standard
The core of AS-24 lies in its objective to ensure that discontinued operations are presented and disclosed in a manner that provides relevant and useful information to financial statement users. Specifically, the standard mandates that entities should:
Separate information about discontinued operations from information about continuing operations. Provide clear and concise disclosures about the nature, timing, and financial impact of discontinued operations. Distinguish the financial results of discontinued operations from those of continuing operations. Report relevant financial data that is material to the discontinued operations.24.4 Presentation and Disclosure
Initial Disclosure
When a company decides to discontinue a segment of its operations, the following initial disclosures should be made:
Description of the Discontinuing Operation: A detailed explanation of the nature of the operation being discontinued should be provided. Business or Geographical Segments: The affected business or geographical segments should be specified. Date and Nature of the Initial Disclosure Event: The date and circumstances of the decision to discontinue should be disclosed. Expected Completion Timing: The expected timing of the completion of the discontinuation process should be stated. Carrying Amount of Assets and Liabilities: The carrying amount of assets and liabilities to be disposed of should be disclosed to give users a clear picture of the financial impact. Revenue and Expense Impact: The amounts of revenue and expenses directly attributable to the discontinued operation should be included. Pre-Tax Profit or Loss and Tax Expense: The impact of the discontinued operations on pre-tax profit or loss and tax expense should be disclosed. Net Cash Flows: The net cash flows from the discontinued operation should be presented to give a comprehensive view of the financial impact.Other Disclosures
When a company disposes of assets or settles liabilities associated with a discontinuing operation, additional disclosures are required:
Gain or Loss on Disposal: The amount of gain or loss recognized on the disposal of assets or settlement of liabilities, as well as related income tax, should be disclosed. Selling Prices and Timings: The net selling prices from the sale of net assets for which the company has entered into binding sale agreements and the expected timing of such sales should be disclosed, along with the carrying amount of those assets.Conclusion
Accounting Standard 24 plays a vital role in enhancing the transparency and usefulness of financial information. By adhering to the guidelines set forth in AS-24, businesses can provide stakeholders with a clear and comprehensive understanding of their discontinued operations. This, in turn, helps in making informed decisions, assessing financial risk, and ensuring compliance with regulatory requirements.