Bakewall Ltd prepares annual financial statements to 31 December. On 1 August 2019 the company closed down one of its operations and classified the corresponding cash-generating unit (CGU) as held for sale. All of the assets in this CGU were within the scope of the measurement requirements of IFRS5. There were no associated liabilities.

The carrying amount of the CGU on 1 August 2019 was £3m and its fair value on that date was estimated to be £2.7m. Estimated disposal costs were £100,000. The CGU remained unsold on 31 December 2019. On this date, its estimated fair value had fallen to £2.5m and estimated disposal costs had risen to £150,000.

The operation which was closed down generated sales revenue of £400,000 between 1 January 2019 and 1 August 2019. Costs of the operation during this period totaled £520,000. This total comprised cost of sales £360,000, distribution costs £70,000 and administrative expenses £90,000.

(a) Explain what is meant by a "disposal group" and explain why the CGU referred to above qualifies as a disposal group. Also list the criteria which determine whether or not a disposal group may be classified as held for sale.

(b) Explain what is meant by a "discontinued operation" and explain why the operation referred to above qualifies as a discontinued operation.

(c) Explain how the transactions referred to above will affect the financial statements of Bakewall Ltd for the year to 31 December 2019. (Ignore taxation).

Answer rating: 100% (QA)

A The disposal group is referred to as a cluster of assets and liabilities that are intended to be s... View the full answer