8 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018 ANALYSIS OF DISCONTINUED OPERATIONS IN BRAZIL AFTER IFRS 5 ADOPTION ANÁLISE DAS OPERAÇÕES DESCONTINUADAS NO BRASIL APÓS ADOÇÃO DO IFRS 5 ANÁLISIS DE LAS OPERACIONES DISCONTINUADAS EN BRASIL TRAS LA ADOPCIÓN DEL IFRS 5 Adolfo Henrique Coutinho e Silva Doutor em Ciências Contábeis – Universidade de São Paulo – FEA/USP, São Paulo-SP, Brasil Professor adjunto da Universidade Federal do Rio de Janeiro – FACC/UFRJ, Rio de Janeiro-RJ, Brasil [email protected]Carlos Eduardo Vieira da Silva Mestre em Ciências Contábeis – Universidade Federal do Rio de Janeiro – FACC/UFRJ, Rio de Janeiro, Brasil Contador – Petrobras, Rio de Janeiro-RJ, Brasil [email protected]Moacir Sancovschi Doutor em Administração – Universidade Federal do Rio de Janeiro – COPPEAD/UFRJ, Rio de Janeiro-RJ, Brasil Professor emérito da Universidade Federal do Rio de Janeiro – FACC/UFRJ, Rio de Janeiro-RJ, Brasil [email protected]José Alonso Borba Doutor em Ciências Contábeis – Universidade de São Paulo – FEA/USP, São Paulo-SP, Brasil Professor titular da Universidade Federal de Santa Catarina – UFSC, Florianópolis-SC, Brasil [email protected]Contextus ISSN 1678-2089 ISSNe 2178-9258 Organização: Comitê Científico Interinstitucional Editor Científico: Diego de Queiroz Machado Editor Executivo: Carlos Daniel Andrade Avaliação: double blind review pelo SEER/OJS Recebido em 25/11/2017 Aceito em 05/07/2018 2ª versão aceita em 13/07/2018 ABSTRACT In this paper we analyzed the effect size and frequency of Brazilian discontinued operations as well as the managers’ justifications presented in the current and annual reports for discontinued operations. Our study comprises the analysis of 191 discontinued operations disclosed by Brazilian companies after the IFRS adoption, for the period from 2010 to June 2016. We hand-collected the reasons for discontinued operations based on management’s explanations provided in the current and annual reports. We performed a qualitative (content analysis) and quantitative (contingency table and nonparametric statistical tests) data analysis. Consistent with the Theory of Corporate Scandals, our results show that there was no evidence that Brazilian companies made opportunistic decisions to discontinue operations in order to increase their core income. Our study extends the literature in two ways: first, by providing new evidence about the impacts of IFRS 5 adoption in a developing market; second, by showing that adopting the forward-looking approach based on managers’ intention does not relate to opportunistic decisions. Keywords: discontinued operations; firms performance; earnings management; positive accounting theory; IFRS.
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8 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
Panel B—Number of firms with discontinued operations (DO) b
Discontinued
Operations
Number of
firms %
With 86 22.4%
Without 298 77.6%
384 100.0%
Panel C—Frequency of discontinued operations firms by year
Number of
years with
DO
Number of
Firms %
1 36 41.9%
2 27 31.4%
3 9 10.5%
4 4 4.7%
5 4 4.7%
6 4 4.7%
7 2 2.3%
86 100.0%
Source: developed by the authors.
Notes: (a) Consolidated Financial Statements are the combined financial statements of parent companies and their
subsidiaries, while Separate Financial Statements are prepared by companies that represent a single entity. (b) The
analysis included 2,688 financial and non-financial companies-year, which amounted to 384 listed companies for
the years 2010 to June 2016.
5.2 The impact of discontinued operations in the income statement
Table 4 presents the impact of IFRS 5 on Brazilian Financial Statements. The balance
sheet of public companies in Brazil usually discloses accounts for discontinued operations and
non-current assets held for sale. Panel A (Table 4) shows a small assets and liabilities
percentage per year for non-current assets held for sale (average of 0.25% for assets and 0.06%
Adolfo H. Coutinho e Silva, Carlos E. Vieira da Silva, Moacir Sancovschi, José Alonso Borba
23 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
for liabilities), and just in a few companies, the effect shows significant relevance. In the same
way, the discontinued operations effects are even smaller in the balance sheet accounts (average
of 0.04% for assets and 0.01% for liabilities).
Panel B (Table 4) describes the number of companies impacted by IFRS 5 per year.
There are 284 firm-year recording non-current assets held for sale and 81 firm-years recording
discontinued operations, and just a few companies with liabilities associated with IFRS 5.
Table 4—Non-current assets held for sale and discontinued operations in the statement of
financial position (balance sheet) of Brazilian public companies Panel A—Amount and percentage of assets and liabilities associated with IFRS 5 by year
Non-current Assets Held for Sale Discontinued Operations
Year
Total Asset
(R$ millions)
%
Asset
%
Liabilities
%
Asset
%
Liabilities
2010 5,436,276,057 0.33% 0.00% 0.02% 0.02%
2011 6,318,733,965 0.07% 0.00% 0.00% 0.01%
2012 7,267,850,680 0.05% 0.00% 0.03% 0.01%
2013 7,436,241,657 0.40% 0.15% 0.04% 0.02%
2014 8,245,054,831 0.25% 0.03% 0.05% 0.01%
2015 8,952,011,557 0.29% 0.10% 0.07% 0.01%
2016, June 8,754,630,019 0.37% 0.14% 0.05% 0.02%
Mean 7,487,256,966 0.25% 0.06% 0.04% 0.01%
Panel B—Number of firms impacted by IFRS 5 by year
Non-Current Assets Held for Sale Discontinued Operations
Year Asset Liabilities Asset Liabilities
2010 35 2 9 5
2011 41 5 9 3
2012 40 1 12 5
2013 43 6 14 6
2014 44 5 11 5
2015 40 10 14 5
2016, June 41 10 12 5
Total 284 39 81 34
Source: developed by the authors.
Note: The analysis included 2.582 financial and non-financial firms-year, which comprises 384 listed firms for the
years 2010 to June 2016. Non-current Assets Held for Sale and Discontinued Operations included the amounts of
the short term and long-term assets and liabilities.
As highlighted in Table 4, the number of companies with non-current assets held for
sale recorded in the balance sheet is higher than the number with discontinued operations. In
both cases, IFRS 5 effect is small in the balance sheet, even though the effect in the income
statement is very significant, as we will discuss later.
Table 5 (panel A) shows that, out of the 2,582 firm-year analyzed, only 191 firms-year
(7.4%) presented discontinued operations. Out of these 191 firm-year that disclosed
discontinued operations, 91 showed negative net income. The percentage of firms with losses
in the income statement was higher in firms with discontinued operations than in the ones
ANALYSIS OF DISCONTINUED OPERATIONS IN BRAZIL AFTER IFRS 5 ADOPTION
24 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
without them (47.6% against 33.2%). This difference in proportions in our sample is statistically
significant [(χ2 (1) =16.362 (p<0.01)].
Panel B (Table 5) shows that in our sample there are more firms with profit in continuing
operations, and losses in discontinued operations (64 firms representing 33.5%), but the
difference in proportions is not statistically significant. Of the companies in the improving
performance group, 53 (82.8%) had a positive net income. On the other hand, Panel C (Table
5) uncovers that in the under observation performance group, 37 companies had a negative net
income (hypothesis Ha).
Table 5—Frequency of discontinued operations (DO) in the statement of profit or loss (income
statement) of Brazilian public companies
Panel A—Relationship between net income (profit and loss) and discontinued operations
Discontinued Operations
Net Income
With
(a)
Without
(b)
Total
(c) a / c
Chi-Square tests (p-
value)
Profit 100 1,597 1,697 5.9% 16.362
Loss 91 794 885 10.3% (0.000)
Total 191 2.390 2,582 7.4% Panel B—Analysis of interaction between continuing operations and discontinued operations
Discontinued Operations
Continuing Operations Profit Loss Total
Chi-square tests (p-
value)
Profit 41 64 105 1,436
Loss 41 45 86 (0.231)
Total 82 109 191 Panel C—Analysis of net income (profit and loss) by performance group
Performance Group
Net Income Healthy Improving
Under
Observation Unhealthy
Profit 41 53 4 -
Loss - 11 37 45
Total 41 64 41 45
Source: developed by the authors.
Note: The analysis included 2,582 financial and non-financial firms-year, which comprises 384 listed firms for the
years 2010 to June 2016. Two-tail p-value of a Pearson Chi-Square test.
The analysis of the effects of the discontinued operations reveals that 11 companies
reversed the net income from loss to profit in the improving performance group, whereas just
four companies reversed the net income from profit to loss in the under observation group.
Table 6 (panel A) shows that more than half of the companies recorded positive
discontinued operations in their income statement (109 companies representing 57.1%). In
2012, we observed more events (32 firm-years), while in 2015 we observed a higher percentage
of negative events (55.2%). The effect of the discontinued operations on the income statement
Adolfo H. Coutinho e Silva, Carlos E. Vieira da Silva, Moacir Sancovschi, José Alonso Borba
25 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
varies significantly from year to year. As we can see in Panel B (Table 6), there were more
negative extreme effects.
Table 6—Effects of discontinued operations (DO) in the statement of profit or loss (income
statement) of Brazilian public companies
Panel A—Number of firm-years with negative and positive Discontinued Operations by year
Effects of DO in income
statement
Year
Negative
(a)
Positive
(b)
Total
(c) (a / c)
2010 9 15 24 37.5%
2011 10 16 26 38.5%
2012 17 15 32 53.1%
2013 9 19 28 32.1%
2014 11 20 31 35.5%
2015 16 13 29 55.2%
June/2016 10 11 21 47.6%
Total (Mean) 82 109 191 42.8%
% 42.9% 57.1% 100.0% Panel B—Effects percentage of discontinued operations in the net income
(b) The effects represent the income from the discontinued operations divided by the sum of the module from
continuing and discontinued operations. See the additional information on Appendix 1.
(c) Two-tail p-value of a Pearson Chi-Square test.
(d) Two-tail p-value of a Mann-Whitney test (U statistic) for independent groups (Informed and Uninformed
justifications).
(e) Two-tail p-value of a Wilcoxon Signed Ranks test (Z statistic) for paired groups (Net Income after and before
the DO effects).
In the data analysis, we segregated 41 firm-years (from 14 companies) with financial
distress and 6 firm-years (three companies) with paralyzed operations in at least one of the
Adolfo H. Coutinho e Silva, Carlos E. Vieira da Silva, Moacir Sancovschi, José Alonso Borba
27 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
analyzed years. We also segregated 32 firms-years (from 21 companies) with discontinued
operations that impacted on their income statement for more than one year. Finally, our analysis
also revealed six firm-years (two companies) with errors in the database. After these exclusions
there were 108 firms-years left for analysis.
We segregated the repeated data from our analysis because they did not represent a new
operation and their effects were not controlled by the managers. We also segregated companies
with financial problems because such companies presented a special situation and usually have
a formal plan for the sale of assets in order to recover the activities that are evaluated by
investors and creditors in court. So, we chose to focus our analysis on the events associated
with the first manager’s decision to discontinue operations in companies with a normal course
of business operations.
For companies in financial distress, we observed that the largest number of events was
concentrated both in the under observation performance group (16 firm-years) and the
unhealthy performance group (15 firm-years). It is noteworthy that the effect size was
significantly higher in the improving performance group and very low in the under observation
performance group. We noticed a different pattern in the number and effect size of discontinued
operations between the companies that are in financial distress and those that are not.
As we can see in Table 7 (panel C), the average effect size for discontinued operations
is greater in the unhealthy performance group (27.3% on average), but there was no statistical
difference for the comparison among the performance groups (hypothesis Hb). It is very
important to highlight that statistical tests revealed that discontinued operations significantly
affected the net income for the individual performance groups even though the data were not
statistically significant when computed together.
Table 7 (panel A) also shows that 59 firm-years (54.6%) did not provide any justification
for discontinued operations, where the largest number of cases belong to the improving
performance group (26 firm-years). The statistical tests show that there was a significant
difference in the proportion of companies that disclosed justifications for discontinued
operations for the healthy and unhealthy performance groups [(χ2 (1) =3.377 (p<0.1)], but not
for the total sample [(χ2 (1) =5.581 (p-value=0.134)] or for the improving and the under
observation performance groups [(χ2 (1) =2.110 (p-value=0.146)] (hypothesis Hc).
ANALYSIS OF DISCONTINUED OPERATIONS IN BRAZIL AFTER IFRS 5 ADOPTION
28 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
Panel B (Table 7) shows that the average effect size of the discontinued operations in
their income statement was greater in the group of companies that presented justifications than
in those that did not (24.4% against 17.3%). Nevertheless, it was not statistically significant
(hypothesis Hd). The statistical test also showed that the effect size of either informed or
uninformed justifications for discontinued operations was not significantly different for each
individual performance group.
In short, discontinued operations are important and affect the net profit of Brazilian
companies significantly when analyzing the performance groups separately. Regardless of that,
the overall effect is not statistically relevant. In addition, evidence shows that there is no
difference in the effect size and proportion of cases between the companies that inform the
reasons for discontinuing operations and those that do not.
5.3 The reasons usually presented by managers to justify the discontinued operations
The qualitative analysis of the data, summarized in Table 8, shows that 58 firm-years
(53.7% out of 108 firm-years) disclosed their current report on discontinued operations prior to
the disclosure of their annual report. Of these companies, 24 firm-years did not inform the
reason for their operations, neither in the current nor in the annual report. This difference in
proportions in our sample is statistically significant [(χ2 (1) =8.874 (p<0.01)] (hypothesis He).
We found that 39 firm-years disclosed the justification for carrying out discontinued
operations in their annual report, with 27 firm-years disclosing it in the management report and
22 firm-years disclosing it in the explanatory notes. Our sample also showed that companies
often used their annual report to disclose reasons for discontinuing operations rather than doing
so in their current report. Only 27 firm-years presented the justifications for carrying out
discontinued operations in their current report.
Table 8—Relationship between the disclosure of current report and the justification for
discontinued operations (DO) Panel A—Relationship between current report disclosure and justification
disclosure
Current Report
Chi-
Square Current Report DO Justifications With Without Total tests a With Without Total With 34 15 49 8,874 31.5% 13.9% 45.4% Without 24 35 59 (0.003) 22.2% 32.4% 54.6% Total 58 50 108 53.7% 46.3% 100.0%
(TO BE CONTINUED)
Adolfo H. Coutinho e Silva, Carlos E. Vieira da Silva, Moacir Sancovschi, José Alonso Borba
29 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
(CONTINUATION)
Panel B—Were managers’ disclosed
Discontinued Operation (DO) justifications
DO Justifications
Current
Report
Annual
Report
With 27 39 Without 81 69 Total 108 108
Source: developed by the authors.
Notes: (a) Two-tail p-value of a Pearson Chi-Square test.
The textual analysis allowed us to identify a pattern for the reasons managers present to
discontinued operations. The most frequent justifications were: (a) focusing on management
(25 cases); (b) adequacy of the capital structure (15); (c) Reducing debt (18); (d) optimizing
ANALYSIS OF DISCONTINUED OPERATIONS IN BRAZIL AFTER IFRS 5 ADOPTION
38 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
Appendix 2—Some examples for disclosed reasons about managers’ intention on
discontinued operations
This Appendix provides some examples on how we classify the reasons for discontinued
operations.
Example 1—Increase performance: “[…] after analyzing the strategic options for the business developed by Alphaville Urbanismo SA
(“Alphaville”) in order to maximize value for its shareholders, it announces that on this date a was contract
made for the sale of 70% of shares Alphaville.” (Gafisa, Current Report of June 7, 2013)
Example 2—Reduce debt: “[…] the sale of the cosmetics manufacturing and marketing business conducted by the Company and its
subsidiaries was adopted. […] The resources from the transaction will be used mainly to reduce the
Company’s net indebtedness.” (Hypermarcas, Current Report, 2015)
Example 3—Adequacy of the capital structure: “This transaction will enable Energisa Group to strengthen its capital structure, significantly by reducing
its leverage, after the effort made on the acquisition of the Rede Group, executed on April 11, 2014.”
(Energisa, Current Report, 2014)
Example 4—Optimized capital allocation & Sale of non-strategic assets: “Non-current assets held for sale and discontinued operations: […] Following the initiatives to disinvest
non-strategic assets and reduce corporate costs, started in 2013, the Company entered into a Purchase and
Sale contract with Eurofins Scientific Group on September 17, 2014 ( “Eurofins”), for the sale of its
Example 5—Focus on the management attention & Reduced debt: “[…] hereby announces that it has hired a first-rate financial institution to advise the Company in its
intention to dispose of all or part of the forestry sector activities currently carried out by its subsidiaries,
in line with its current strategic planning Focused on concentrating its activities on the transport area and
logistics as well as reducing its short and long term indebtedness, without, however, discarding its
industrial activities of wood processing, which will continue.” (Batistella, Annual Report—Managers’
report—2011)
Example 6—Increased performance & Adequacy of the capital structure & Reduced debt: “The Company also decided to discontinue the hardening, re-rolling, pickling and steel service center
activities, carried out at the plant located in São Bernardo do Campo—SP, pursuant to a material fact
disclosed on December 10, 2012. […] The Company decided to discontinue several businesses in order
to optimize its results, strengthen its financial position and capitalize the Company. […] The assets of
these businesses will be put up for sale and these resources will aim to reduce the Company’s debt and
improve the profitability of its other businesses.” (Mangels, Annual Report—Managers’ report—2012)
Example 7—Reduced debt & Optimized capital allocation: “Available-for-sale assets: On November 18, 2014, the Company concluded negotiations with São João
Energética SA, FIP Investimentos Sustentáveis and Brookfield Energia Renovável SA, indirectly
controlled by Brookfield Renewable Energy Partners, for the sale of energy generation assets both in
operation and under construction. […]. The value of the transaction, subject to the usual adjustments of
the balance sheet to be drawn up in the execution of the transaction, is approximately R$ 1,428,100. This
amount will give Energisa a reduction in consolidated net debt of R$ 2,607,900, in addition to a reduction
in the investment commitments of R$ 200,000 until the beginning of 2016.” (Energisa, Annual Report—
Managers’ report—2014)
Adolfo H. Coutinho e Silva, Carlos E. Vieira da Silva, Moacir Sancovschi, José Alonso Borba
39 CONTEXTUS – Revista Contemporânea de Economia e Gestão. Vol. 16 – Nº 3 – set./dez. 2018
Appendix 3—Examples about current and annual report timely discontinued operations (DO) disclosure
Notes: (a) acronyms: CR—Current Report; DO—Discontinued Operations. (b) Examples elaborated from data of Brazilian companies, except for example 8.
Panel A - Example 1 Panel E - Example 5
Year 1 Year 2 Year 1 Year 2
Panel B - Example 2 Panel F - Example 6
Year 1 Year 2 Year 1 Year 2
Panel C - Example 3 Panel G - Example 7
Year 1 Year 2 Year 1 Year 2
Panel D - Example 4 Panel H - Exemplo 8
Year 1 Year 2 Year 1 Year 2
CR's DisclosePurchase proposal
August
30
Septe
mber
3
May 2
8
2012AnnualReport
Disclose
Marc
h 2
0
Event
CR's DiscloseDO Conclusion
CR's DiscloseDO Conclusion
Septe
mber
30
January
5
2015AnnualReport
Disclose
Marc
h 2
9
Event
Septe
mber
12
2013AnnualReport
Disclose
Febru
ary
26
Event
June 2
8
Nove
mber
15
Septe
mber
30
Decem
ber
25
2015 AnnualReport
Disclose
Marc
h 3
0
CR's Disclose:RegulatoryGovernment
Approval
Event
CR's DiscloseContract Signature
Decem
ber
9
CR's DiscloseContractSgnature
CR's DiscloseContract
Signature
Septe
mber
14
Septe
mber
30
May 2
8
2011 AnnualRepor
Disclose
Marc
h 3
0
Event I
CR's DiscloseDO Conclusion(Event III)
CR's DiscloseContract
Sgnature
2011 AnnualReport
Disclose
Marc
hl
7
EventManagers Not Disclosed
DO decision
CR's DiscloseBoard of Directs
Approval and
Contract Signature
Septe
mber
12
June 5
2011AnnualReport
Disclose
Marc
h 2
7
Event
June 2
0
CR's DiscloseFirst DO
information
CR's DiscloseContract Review
Managers decision
on Sept, 2011(not disclosed)
CR's DiscloseDO Conclusion
January
1
Decem
ber
2
2015AnnualReport
Disclose
Marc
h 1
0
Event
CR's DiscloseContract Signature
CR's DiscloseDO Managers' Intention
(Highly Probable Sale Plan)CR's DiscloseDO Conclusion