HAVANNAH DEC 2013 QUESTION 2 (B)

In May 20X3, Havanna decided to sell one of its regional business divisions through a mixed asset and share deal. The decision to sell the division at a price of $40 million was made public in November 20X3 and gained shareholder approval in December 20X3. It was decided that the payment of any agreed sale price could be deferred until 30 November 20X5. The business division was presented as a disposal group in the
statement of financial position as at 30 November 20X3. At the initial classification of the division as held for sale, its net carrying amount was $90 million. In writing down the disposal group’s carrying amount, Havanna accounted for an impairment loss of $30 million which represented the difference between the carrying amount and value of the assets measured in accordance with applicable International Financial
Reporting Standards (IFRS). In the financial statements at 30 November 20X3, Havanna showed the following costs as provisions relating to the continuing operations. These costs were related to the business division being sold and were as follows.
(i) A loss relating to a potential write-off of a trade receivable owed by Cuba Sport, which had gone into liquidation. Cuba Sport had sold the goods to a third party and the division had guaranteed the receipt of the sale proceeds to the Head Office of Havanna.
(ii) An expense relating to the discounting of the long-term receivable on the fixed amount of the sale price of the disposal group
(iii) A provision was charged which related to the expected transaction costs of the sale including legal advice and lawyer fees.
The directors wish to know how to treat the above transactions. (9 marks)

The reference is in the title to this post. I have a particular problem with the second half of this question – regarding the costs included in the provisions.

Regarding (i) above about the write off of Cuba Sport receivable, the answer from my BPP kit is as follows:

The trade receivable from Cuba Sports should have been tested for impairment immediately before classification of the division as held for sale. An impairment loss for the amount of the trade receivable should have been recognised and would have reduced the carrying amount of the division on the initial classification as held for sale.In addition, the division has guaranteed the sale proceeds to Havanna’s Head Office, so as the amount owing has not been collected a refund would be needed, and the sales price of the division(and hence the fair value less costs to sell) would need to be adjusted to reflect the amount of the potential refund.

I don’t understand the guarantee of the sale proceeds and how this leads to a refund. What’s this refund thing? And how does this affect the fair value less costs to sell, why does the answer say “… would need to be adjusted to reflect the amount of the potential refund” How does the refund (and refund by whom to whom) take part in the fair value less costs to sell? Will be get a lower selling price because of the refund?

Also regarding (ii) above, the answer says “The discounting expense for the sales price of the disposal group reflects the fact that payment is deferred until 30 November 20X5. This discount should not have been recognised in continuing operations, but should have been taken into account in calculating the fair value less costs to sell of the disposal group.”

How is the cost of discounting a selling costs? Please explain this to me. I thought the discount is unwinded in the P&L account each year, so how does it feature in the fair value less costs to sell?

Thanks,

ME…