Problem 4-2 (Essay)

On November 1, 2016, Campbell Corporation management decided todiscontinue operation of its Rocketeer Division and approved aformal plan to dispose of the division. Campbell is a successfulcorporation with earnings of $150 million or more before tax foreach of the past five years. The Rocketeer Division, a major partof Campbell’s operations, is being discontinued because it has notcontributed to this profitable performance.

The division’s main assets are the land, building, and equipmentused to manufacture engine components. The land, building, andequipment had a net book value of $42 million on November 1,2016.

Campbell’s management has entered into negotiations for a cash saleof the division for $36 million (net of costs to sell). The saledate and final disposal date of the division is expected to be July1, 2017. Campbell Corporation has a fiscal year ending May 31. Theresults of operations for the Rocketeer Division for the 2016–17fiscal year and the estimated results for June 2017 are presentedbelow. The before-tax losses after October 31, 2016, are calculatedwithout depreciation on the building and equipment.

	Period		Before-Tax Loss
	June 1, 2016, to October 31, 2016		$(2,500,000	)
	November 1, 2016, to May 31, 2017		(1,600,000	)
	June 1 to 30, 2017 (estimated)		(300,000	)

The Rocketeer Division will be accounted for as a discontinuedoperation on Campbell’s financial statements for the year ended May31, 2017. Campbell’s tax rate is 25% on operating income and allgains and losses. Campbell prepares financial statements inaccordance with IFRS.

(d)
Assume that Campbell Corporation management was debating whetherthe sale of the Rocketeer Division qualified for discontinuedoperations accounting treatment under IFRS. List specific factorsor arguments that management would use to suggest that theRocketeer Division should be treated as a discontinued operation.Why might management have a particular preference about whichtreatment is given? From an external user’s perspective, whatrelevance does the presentation of the discontinued operation havewhen interpreting the financial results?