A Ltd is a company which specialises in the processing of canned beans and canned spaghetti for…

 A Ltd is a company which specialises in the processing of canned beans and canned spaghetti for sale to retail shops. The canned beans are processed from beans bought in directly from UK farmers. The canned spaghetti is processed from pasta which is purchased from suppliers in Italy. Processing and canning take place at one of two factories in the United Kingdom, one factory dealing with beans and one with spaghetti. Each factory maintains separate financial statem ents in order to produce a monthly operating report for Head Office.

Once canned, the products are transferred to one of four distribution centres (two centres per factory). The distribution centres (which also maintain their own individual financial statements) are used to transfer the products to shops and supermarkets following orders for sales. The accounting year end of the company is 31 December.

On 30 November 1995, a decision was made to rationalise the business. Due to adverse exchange rate movements it was decided to discontinue the processing and sale of canned spaghetti, and concentrate exclusively on canned beans. The consequence of this decision was that the factory which processed pasta into spaghetti and one of the associated distribution centres would be sold, and the majority of the personnel employed at these locations made redundant. It was decided to commence running down the processing operations and the distribution operations in the factory and the distribution centre to be closed on 15 January 1996, with an expectation to complete the closure by 31 March 1996. Apart from carrying out extensive negotiations with relevant Trades Unions regarding redundancy packages, no other closure activities were to be commenced before 15 January 1996.

On 30 November 1995, A Ltd also decided to rationalise its distribution operation. The rationalisation included closing one of the four centres (as noted above) and redefining the areas covered by the remaining centres (so that the three remaining centres took on the distribution formerly carried out by the four centres, with the work relating only to baked beans). The timetable for the rationalisation of the distribution operation in the three remaining centres was identical to that for the closure of the factory and the fourth centre (rundown of spaghetti distribution and reallocation of beans distribution commencing 15 January 1996, rationalisation complete by 31 March 1996).

You are the Chief Accountant of A Ltd, and one of the directors has recently visited you to discuss the accounting treatment of the rationalisation. The director is unsure as to whether the rationalisation will have any impact on the financial statements for the year ended 31 December 1995 given that the programme did not actually commence until 15 January 1996. The director is aware that there is an accounting standard which deals with the issue of discontinued operations but is unaware of any relevant details. The 1995 financial statements are currently in the course of preparation and are expected to be formally approved by the directors at the April 1996 board meeting. For the purposes of this question, you should assume that today’s date is 29 February 1996.

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