2 (IFRS 5) (30 marks) Businesses are often faced with challenging decisions whether to discontinue a part of their overall business or close an entity. IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations provides guidance on the accounting treatment in such situations. Kitchen Dcor Ltd, whose financial year end is 31 December every year, is a company that sells kitchen fitting in the domestic market. The company has three (3) manufacturing plants based in Windhoek, Rehoboth and Mariental. Due to change in customer tastes, there have been a deterioration in the performance of the Rehoboth division in the last 12 months. At a Board meeting on 14 December 2015, the Directors of Kitchen Decor decided, reluctantly, to cease manufacturing at the Rehoboth division and sell the factory. The staff, customers and suppliers were immediately informed and a press release was put in the Namibian newspaper. The managing director has approached you as the financial accountant and has directed you that the Rehoboth operations should be shown as a discontinued operation in the financial statements for the year ending 31 December 2015. Due to the declining business performance of the Rehoboth division on 1 October 2015, Kitchen Dcor Ltd increased production capacity at its Windhoek division. The following are the extracts from Kitchen Dcor Ltd Statement of profit or loss and other comprehensive income: Revenue Cost of sales Gross profit/(loss) Windhoek N$000 30 000 Rehoboth N$000 19 000 Mariental N$000 31 Dec. 2015 Total N$000 31 Dec. 2014 Total N$000 4500 (23 500) (23 180) (3 375) Operating expenses 6 500 (1800) (4180) (1 100) 1125 (225) (50 055) 3445 53 500 (51 800) 61000 9 200 (3 125) (2 400) Profit/(loss) before tax 4 700 (5 280) 900 320 6 800 YOU ARE REQUIRED TO: a) Explain the meaning of a 'non-current asset for held sale and a discontinued operation. (8 marks) b) Explain whether the Managing Director's directive to report Rehoboth as a discontinued operation is justifiable. (5 marks) Page 2 of 4 c) Assuming the managing director's directive has been followed, re-draft the extracts from the Statement of profit or loss and other comprehensive income for the year ended 31 December 2015 (including comparatives) in accordance with the requirements of IFRS 5, and draft a suitable note relating to discontinued operations which would appear in the notes to the financial statements. (14 marks) d) On 1 October 2015 the Directors of Kitchen Dcor Ltd decided to sell a machine, used within the Mariental operation and which was an excess to what is required. The machine had a cost of N$60 000 on 1 January 2013 and was expected to sell for N$25 000. A buyer was found on 20 December 2015 at that price, although the sale was not completed until after the year end. On 1 October 2015, the machine met the 'held for sale' criteria of IFRS 5. The company charges depreciation on plant and equipment at 20% on cost. Explain how the above transaction should be treated in the financial statements for the year ending 31 December 2015