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In this question there is a phrase ” Also during the year to 31 May 2013, there had been draft
agreements and some correspondence with investment bankers, which showed in principle only that the subsidiary was still for sale. ”What is the significance of this relating to the answer. Because the examiner writes in his answer “The draft agreements with investment bankers appear not to be sufficiently detailed to prove that the subsidiary met the criteria at the point of classification as required by IFRS 5.”
So does like IFRS 5 specifically say that the asset held for sale shouldn’t be shown as held for sale in principle only? How does this phrase link with IFRS 5 and what is it trying to hint to us? How does is show that it’s not detailed enough to prove the IFRS 5 criteria?
Also, we are told in the question “Janne had shown the subsidiary as an asset held for sale and presented it as a discontinued operation in the financial statements at 31 May 2012.”
And the examiner writes in the answer ” The subsidiary should have been treated
as a continuing operation in the financial statements for both years ended 31 May 2012 and 31 May 2013.”Now, I get why it can’t be shown as held for sale in 2013 because in 2013 additional changes were made in the subsidiary. But why not in 2012? There was no apparent problem in 2012 so why not allow it to be shown in 2012 as held for sale? It just doesn’t make sense.
The criteria for an asset to be classified as Held for Sale include the following criteria:
that it shall be being actively marketed,
at a price that the directors are prepared to accept and
that the sale is reasonably certain within 12 months
The “draft agreements and some correspondence with investment bankers, which showed in principle only that the subsidiary was still for sale” hardly indicates reasonable certainty that the sale will go ahead within 12 months
OK?
Because at 2013 year end we are only at the stage where “draft agreements and some correspondence with investment bankers, which showed in principle only that the subsidiary was still for sale” so what must the situation have been like 12 months earlier?
Okay but does that mean that the authorization given by shareholders in the 2012 annual general meeting to dispose of the subsidiary is then rendered useless to classify it as held for sale as at 31.May.2012?
Did the shareholders authorise the disposal? That would be a strange occurrence!
Yes if you see the original question the shareholders had given approval to dispose of the subsidiary within the year.
But having given that approval, if the directors are asking for an amount in exchange for the subsidiary that is unrealistic, then it should never have been classified as held for sale.
What should have happened at the next general meeting is that the institutional investors should have directed some pretty searching questions to the directors to determine why the board was apparently reluctant to dispose of the subsidiary
Right so in essence that phrase “of only showing in principal” was just a hint that the IFRS criteria weren’t met and therefore we should disagree with the scenario. Got it.
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