On November 1, 2016, Campbell Corporation management decided to discontinue oper

Question

On November 1, 2016, Campbell Corporation management decided to discontinue operation of its Rocketeer Division and approved a formal plan to dispose of the division. Campbell is a successful corporation with earnings of $150 million or more before tax for each of the past five years. The Rocketeer Division, a major part of Campbell’s operations, is being discontinued because it has not contributed to this profitable performance.

The division’s main assets are the land, building, and equipment used to manufacture engine components. The land, building, and equipment had a net book value of $42 million on November 1, 2016.

Campbell’s management has entered into negotiations for a cash sale of the division for $36 million (net of costs to sell). The sale date and final disposal date of the division is expected to be July 1, 2017. Campbell Corporation has a fiscal year ending May 31. The results of operations for the Rocketeer Division for the 2016–17 fiscal year and the estimated results for June 2017 are presented below. The before-tax losses after October 31, 2016, are calculated without depreciation on the building and equipment.

The Rocketeer Division will be accounted for as a discontinued operation on Campbell’s financial statements for the year ended May 31, 2017. Campbell’s tax rate is 25% on operating income and all gains and losses. Campbell prepares financial statements in accordance with IFRS.

(d)

Assume that Campbell Corporation management was debating whether the sale of the Rocketeer Division qualified for discontinued operations accounting treatment under IFRS. List specific factors or arguments that management would use to suggest that the Rocketeer Division should be treated as a discontinued operation. Why might management have a particular preference about which treatment is given? From an external user’s perspective, what relevance does the presentation of the discontinued operation have when interpreting the financial results?

Period June 1, 2016, to October 31, 2016 November 1, 2016, to May 31, 2017 June 1 to 30, 2017 (estimated) Before-Tax Loss $(2,500,000) (1,600,000) (300,000)

Explanation / Answer

lets define discontinued operations:

An entity is said to have experienced a discontinuance of operations when it disposes of a segment of its business.

Now to your answer:

1.The management has authorized formal plan to dispose the division.
2.The asset is available for immediate sale.
3.There is no chance of any change to the plan of disposal.
4.Sale will happen within one year.
5.Management actively entered into negotiations for a cash sale of the division.
6.The division is a separate component.

From an external prospective , if a part of business is discontinued mainly becasue it is loss making.

So the results published of the company , show a lower profit.if the line of the business is sold off ,then it is goods from an external point of view as it clears otu the management's worry to bail out the loss making business and focus on its core business.Plus the sale of division brings in cash that would help to clear out the exisiting debt on company's balance sheet.

To conclude as someone interpreting the results , the full dislosure will help me better the reason for making the choiec of discontinuation ,plus i would be inclined to invest in the company

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