Question

KIDSaWARE Incorporated (KWI) is a retailer of children’s clothing that has been in operation for over 30 years. The stores are located in Ontario and Quebec. Four years ago, KWI bought all of the shares of Prairie Kids Ltd. (PKL), an existing chain of retail children’s clothing stores that operated throughout Alberta, Saskatchewan, and Manitoba. PKL was struggling against severe competition, particularly from Walmart. KWI had just had a successful initial public offering and believed that it could return PKL to profitability by injecting fresh capital to modernize the stores, coordinating PKL’s marketing with KWI’s and introducing KWI merchandise into PKL stores. PKL was maintained as a separate corporate entity.
The PKL store managers reported to the PKL district managers, as before, and the district managers reported to the sales man-ager of KWI. All corporate affairs were conducted through KWI’s head office in Brampton, Ontario. On 17 September 20X1, however, the KWI Board of Directors decided that the PKL venture was not successful, and the Board decided to put PKL up for sale. KWI paid a broker $ 100,000 to find a buyer for PKL. If an acquiror could not be found, PKL would be shut down.
In January 20X2, the broker did find a potential buyer. The buyer agreed to acquire PKL, effective 15 March, paying $ 0.15 per share for 100% of the PKL shares, plus assuming the outstanding debt and all future lease commitments ( Exhibit 1). Because the potential buyer had no direct experience with children’s wear, a condition of the sale was that KWI management would continue to be involved in managing PKL until the end of the next fiscal year— that is, through the Christmas 20X2 selling season. Meanwhile, the audit committee was presented with a draft of the KWI income statement (Exhibit 2) that treated the PKL disposal as a discontinued operation. KWI’s fiscal year ended on 31 January 20X2.

Required:
1. Assume that the disposal of PKL qualifies as a discontinued operation. Is the draft KWI presentation correct? If not, how should it be reported?
2. Assume instead that the disposal does not qualify as a discontinued operation but that PKL has become a held- for- sale asset as the result of the Board meeting on 17 September 20X1. How would the potential disposal of PKL be reported?
3. Does PKL qualify for reporting as a discontinued operation under IFRS? Explain.



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  • CreatedFebruary 17, 2015
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