Size matters: When do minor discontinued operations become major?

Abstract

Purpose: This paper explores the thresholds that firms apply when classifying discontinued operations in accordance with the requirement in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (IFRS 5). Motivation: The IFRS 5 requirement, that only major operations may be classified as discontinued operations, is vague and open to interpretation. Existing literature is largely silent on what firms deem as major, whether diversity exists in practice, and whether the classification decision can be linked to earnings management. Methodology: The sample includes financial statement data of listed South African firms for the financial years ending 2016 to 2022. Univariate analyses and graphical presentations are used to address the research questions. Main findings: Diversity exists as to what firms deem as major discontinued operations. A non-negligible portion of firms classify relatively minor operations as discontinued. Evidence shows that firms’ classification decision is related to whether the discontinued operations incurred losses and whether a firm is audited by a Big Four auditor. No evidence of earnings management through meeting or beating performance benchmarks is found. Practical implications: The paper contributes to a long-standing request to the International Accounting Standards Board to provide guidance on the classification of discontinued operations. The observed thresholds can be used in the decision-making process of practitioners and tertiary educators when assessing whether an operation meets the size requirement of IFRS 5. Contribution: The paper contributes to the limited literature on the topic and relies on hand-collected data that could not be found on commonly used databases.