Question

Epsilon is a listed entity. You are the financial controller of the entity and its consolidated financial statements for the year ended 30 September 2008 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 2008 the directors decided to close down a business segment which did not fit into its future strategy. The closure commenced on 5 October 2008 and was due to be completed on 31 December 2008. On 6 September 2008 letters were sent to relevant employees offering voluntary redundancy or redeployment in other sectors of the business. On 13 September 2008 negotiations commenced with relevant par ties 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 totaling $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 2009. The actuaries have advised that the accumulated 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 2009.
(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 ten years from 30 September 2008. The annual lease rentals on this 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 $5.5 million in return for early termination of the lease. There are no realistic opportunities for Epsilon to sub-let 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 $6.14.
(v) Plant having a net book value of $11 million at 30 September 2008 will be sold for $2 million.
(vi) The operating losses of the business segment for October, November and December 2008 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 2008.



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  • CreatedSeptember 12, 2012
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