APF Limited is a divisionalized Irish company which trades from a number of retail outlets throughout Ireland. The company, which commenced trading approximately five years ago, prepares its financial statements to 31 December each year. During the last quarter of 2007, and the first half of 2008, APF Limited experienced severe trading difficulties and liquidity problems for the first time. Consequently, following a review of the business by the directors, it was decided to run down the non-core activities and focus upon the ‘premium’ end of the company’s market.
Issue 1 During 2008, APF Limited sold, for €1,000,000 cash, a division of the company.
The sale proceeds represent the profit on the sale of the business and the directors wish to classify the proceeds as an extraordinary item in the company’s statement of comprehensive income for the year ended 31 December 2008. The directors believe that, while withdrawal from this market will have a material effect on the nature and focus of the company’s operations, the company will benefit in the long-term because this market was too specialised and the division’s customer base was entirely different from that of the company’s core business. Up to the point of sale, this division had contributed the following:
€'000 Revenue #25200 Cost of sales 1,500 Administrative expenses 500 Issue 2. In December 2008, the directors of APF Limited decided to close all of the company’s retail outlets that sell less expensive, less exclusive items. The directors estimate that it will take nine months to wind down these operations and that the net loss from these retail operations during this period will be €800,000. No provision has yet been made in the draft 2007 financial statements for this loss. The directors believe that any assets relating to these retail outlets are stated at their recoverable amount at 31 December 2008.
Requirement Explain how each of the above issues should be reflected in APF Limited’s financial statements for the year ended 31 December 2008.