$*$Question $9$

Epsilon is a listed entity. You are the financial controller of the entity and its consolidated financial statements for the year ended $30$ September $2018$ are being prepared. Your assistant, who has prepared

the first draft of the statements, is unsure about the correct treatment of a transaction and has asked

for your advice. Details of the transaction are given below.

On $31$ August $2018$ the directors decided to close down a business segment which did not fit into

its future strategy. The closure commenced on $5$ October $2018$ and was due to be completed on

$31$ December $2018.$ On $6$ September $2018$ letters were sent to relevant employees offering voluntary

redundancy or redeployment in other sectors of the business. On $13$ September $2018$ negotiations

commenced with relevant parties with a view to terminating existing contracts of the business segment

and arranging sales of its assets. Latest estimates of the financial implications of the closure are as follows:

$($i$)$ Redundancy costs will total $$30$ million, excluding the payment referred to in $($ii$)$ below.

$($ii$)$ The pension plan $($a defined benefit plan$)$ will make a lump sum payment totalling $$8$ million to the

employees who accept voluntary redundancy in termination of their rights under the plan. Epsilon

will pay this amount into the plan on $31$ January $2019.$ The actuaries have advised that the accumu$-$

lated pension rights that this payment will extinguish have a present value of $$7$ million and this sum

is unlikely to alter significantly before $31$ January $2019.$

$($iii$)$ The cost of redeploying and retraining staff who do not accept redundancy will total $$6$ million.

$($iv$)$ The business segment operates out of a leasehold property that has an unexpired lease term of

$10$ years from $30$ September $2018.$ The annual lease rentals onthis property are $$1$ million, payable

on $30$ September in arrears. Negotiations with the owner of the freehold indicate that the owner

would accept a single payment of $$5\mathrm{.}5$ million in return for early termination of the lease. There

are no realistic opportunities for Epsilon to sublet this property. An appropriate rate to use in any

discounting calculations is $10\%$ per annum. The present value of an annuity of $$1$receivable annually

at the end of years $1$ to $10$ inclusive using a discount rate of $10\%$ is $$6\mathrm{.}14.$

$($v$)$ Plant having a net book value of $$11$ million at $30$ September $2018$ will be sold for $$2$ million.

$($vi$)$ The operating losses of the business segment for October, November and December $2018$ are

estimated at $$10$ million.

Your assistant is unsure of the extent to which the above transactions create liabilities that should be

recognised as a closure provision in the financial statements. He is also unsure as to whether or not the

results of the business segment that is being closed need to be shown separately.

Required:

Explain how the decision to close down the business segment should be reported in the financial

statements of Epsilon for the year ended $30$ September $2018.$