Page 19 - OCS Workbook - Day 2 Suggested Solutions (May 2018)

SUGGESTED SOLUTIONS

Impact of store closure on financial statements

The impact on our financial statements if we do decide to make store closures would be dependent
on a few variables, in particular if the stores are sold/disposed of before year end or still “held for
sale/discontinued operations” at the year end.

Closure and disposal of stores before year-end

Disposed of an a non-current asset

If the stores are closed before the year end and either sold on or disposed of each as one unit then
then the accounting treatment would be in line with IAS16. The most likely approach would be to
transfer any remaining inventory back to the main distribution centre in Lowerland and then either
sell the store as a unit or break up the assets and sell individually.

The accounting treatment would be to “dispose” of the assets by removing the asset from the
Statement of Financial Position, along with any accumulated depreciation relating to the assets and
then account for the proceeds of the disposal. If there is a difference between the proceeds and the
carrying amount of the asset then the difference should be recognised as a profit or loss in disposal on
the statement of profit or loss.

The any of the assets had previously been revalued then any loss may be offset against the
revaluation surplus account and any remaining unrealised gains in the revaluation surplus must now
be removed.

Recognised as a discontinued operation

The more likely treatment for the disposal of complex assets such as retail stores would be to dispose
of the stores and then present the disposal as “discontinued operations” on the statement of financial
position in line with IFRS 5.

IFRS 5 states that a discontinued operation is a component of an entity that has either been disposed
of or is classified as held for sale. For the component to classify as “discontinued operations” it must:

• represent a separate major line of business or geographical area of operations
• be part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations
• or be a subsidiary acquired exclusively with a view to resale.

Since we are not selling off all of the retail stores we would not satisfy the component of being a
separate major line however if we were to divide our stores up into groups of airports stores, city
centre stores and shopping mall stores and then discontinue all except for the airport stores then we
could certainly present as a discontinued operation. Alternatively we would discontinue certain
geographical areas such as America and Europe.

The benefits of presenting the disposal as a discontinued operation are that we are able to show
separate presentation on the statement of financial position. In line with IFRS5 the statement of
profit or loss would be presented in full for the continuing operations (airport stores, third party
sellers, digital sales etc) and then the discontinued operations would be presented separately as one
single figure on the face of the statement of profit or loss.

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