When the parent company acquires or sells a subsidiary during the financial year, cash flows arising from the acquisition or disposal are presented within investing activities. In relation to Davenport, no cash consideration has been paid during the current year since the consideration consisted of a share for share exchange and some deferred cash. The deferred cash would be presented as a negative cash flow within investing activities but only when paid in two years’ time.
This does not mean that there would be no impact on the current year’s statement of cash flows. On gaining control, Moyes would consolidate 100% of the assets and liabilities of Davenport which would presumably include some cash or cash equivalents at the date of acquisition. These would be presented as a cash inflow at the date of acquisition net of any overdrafts held at acquisition. Adjustments would also need to be made to the opening balances of assets and liabilities by adding the fair values of the identifiable net assets at acquisition to the respective balances. This would be necessary to ensure that only the cash flow effects are reported in the consolidated statement of cash flows. Fair value adjustments to assets and liabilities could also have deferred tax effects which would need adjusting so that only cash payments for tax are included within the statement of cash flows. Dividends received by Moyes from Davenport are not included in the consolidated statement of cash flows since cash has in effect been transferred from one group member to another. The non-controlling interest’s share of the dividend would be presented as a cash outflow in financing activities.
On the disposal of Barham, the net assets at disposal, including goodwill, are removed from the consolidated financial statements. Since Barham is overdrawn, this will have a positive cash flow effect for the group. The overdraft will be added to the proceeds (less any cash and cash equivalents at disposal) to give an overall inflow presented in investing activities. Care would once again be necessary to ensure that all balances at the disposal date are removed from the corresponding assets and liabilities so that only cash flows are recorded within the consolidated statement of cash flows.

IFRS^® 5 Non-current Assets Held for Sale and Discontinued Operations defines a discontinued operation as a component of an entity which either has been disposed of or is classified as held for sale, and
(i) represents a separate major line of business or geographical area of operations;
(ii) is a single co-ordinated plan to dispose of a separate major line or area of operations;
(iii) is a subsidiary acquired exclusively for resale.
Both entities would be components of the Moyes group since their operations and cash flows are clearly distinguishable for reporting purposes. Barham has been sold during the year but there appears to be other subsidiaries which operate in similar geographical regions and produce similar products. Little guidance is given as to what would constitute a separate major line of business or geographical area of operations. The definition is subjective and the directors should consider factors such as materiality and relevance before determining whether Barham should be presented as discontinued or not.
To be classified as held for sale, a sale has to be highly probable and the entity should be available for sale in its present condition. At face value, Watson would not appear to meet this definition as no sales transaction is to take place.
IFRS 5 does not explicitly extend the requirements for held for sale to situations where control is lost. However, the International Accounting Standards Board (the Board) have confirmed that in instances where control is lost, the subsidiaries’ assets and liabilities should be derecognised. Loss of control is a significant economic event and fundamentally changes the investor– investee relationship. Therefore situations where the parent is committed to lose control should trigger a reclassification as held for sale. Whether this should be extended to situations where control is lost to other causes would be judgemental. It is possible therefore that Watson should be classified as held for sale but to be classified as a discontinued operation, Watson would need to represent a separate major line of business or geographical area of operation.

Different accounting standards use different levels of probabilities to discuss when assets and liabilities should be recognised in the financial statements. For example, economic benefits from property, plant and equipment and intangible assets need to be probable to be recognised; to be classified as held for sale, the sale has to be highly probable. Under IAS^® 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be probable to be recognised. Uncertain assets on the other hand would have to be virtually certain. This could lead to a situation where two sides of the same court case have two different accounting treatments despite the likelihood of payout being identical for both parties. Contingent consideration is recognised in the financial statements regardless of the level of probability. Rather the fair value is adjusted to reflect the level of uncertainty of the contingent consideration.
The Board has confirmed a new approach to recognition criteria which requires decisions to be made with reference to the qualitative characteristics of financial information. An entity should now recognise an asset or liability if such recognition provides users of financial statements with:
– more relevant information and faithful representation of the asset or liability;
– information which results in benefits exceeding the costs of the information.
A key change here is to remove the probability criterion. This means that more assets and liabilities with a low probability of inflow or outflow of economic resources are likely to be recognised. The Board accepts that prudence could still mean there will be inconsistencies in the recognition of assets and liabilities within financial reporting standards but may be a necessary consequence of providing the most useful information.