Size matters: When do minor discontinued operations become major?

Figures & data

Table 1. Sample selection process.

	Firm-years
IRESS Expert JSE-listed firm years 2016–2022	2 163
Less: Firm-years with no discontinued operations	(1 839)
Subtotal: Firm-years with discontinued operations	324
Less: Firm-years without a current year classification of discontinued operations	(148)
Subtotal: Firm-years with first-time classification of discontinued operations	176
Less: Firm-years in the financial industry (remaining)	(2)
Less: Firm-years with financial statements in a foreign currency (remaining)	(35)
Final sample	139

Table 2. Materiality threshold categories used to categorise the size of discontinued operations.

Categories of discontinued operations based on materiality thresholds	Revenue of discontinued operation to revenue of continuing operations	Total assets of discontinued operation to total firm assets
Sub-minimum threshold	<0.25%	<0.5%
Component materiality	>=0.25% and <0.5%	>=0.5% and <1%
Normal materiality	>=0.5% and <2%	>=1% and <2%
Clearly material	>=2%	>=2%

Figure 1. Frequency plots of materiality thresholds based on revenue and total assets.

Table 3. Descriptive statistics on the total sample.

Variables	N = 139
Firm total revenue (Rm)
Mean (SD)	19,201 (30,802)
Median (IQR)	8,542 (1,686, 23,334)
Range	73, 163,784
Firm total assets (Rm)
Mean (SD)	21,275 (26,570)
Median (IQR)	11,076 (2,775, 25,271)
Range	77, 117,516
Revenue thresholds, n (%)
Sub-minimum threshold	8 (6.2%)
Component materiality	6 (4.7%)
Normal materiality	25 (19%)
Clearly material	90 (70%)
Missing	10
Asset thresholds, n (%)
Sub-minimum threshold	16 (16%)
Component materiality	4 (3.9%)
Normal materiality	9 (8.8%)
Clearly material	73 (72%)
Missing	37
Loss-making discontinued operations, n (%)
0	53 (38%)
1	86 (62%)
Big four auditor, n (%)
0	46 (33%)
1	93 (67%)
Avoid loss, n (%)
0	36 (26%)
1	103 (74%)
Avoid earnings decrease, n (%)
0	52 (37%)
1	87 (63%)

Table 4. Descriptive statistics based on revenue thresholds (n = 129).

Variables	Sub-minimum threshold n = 8	Component materiality n = 6	Normal materiality n = 25	Clearly material n = 90	Statistic	p-value	Overall n = 129
Firm total revenue (Rm)					0.56	0.64^1
Mean (SD)	20,682.99	5,684.34	24,349.60	19,893.29			20,145.00
	(22,985.49)	(4,886.78)	(31,991.93)	(33,264.39)			(31,692.64)
Median (IQR)	15,125.45	5,379.98	16,425.35	8,392.06			9,213.12
	(4,346.82,	(1,349.92,	(7,164.70,	(1,785.04,			(2,098.06,
	25,611.00)	9,498.42)	25,799.00)	22,961.36)			24,135.00)
Range	1,206.36,	665.61,	467.84,	161.80,			161.80,
	69,681.00	11,802.65	156,855.00	163,783.50			163,783.50
Firm total assets (Rm)					0.27	0.85^1
Mean (SD)	23,540.52	19,777.87	24,669.01	19,587.35			20,826.18
	(29,537.93)	(35,822.04)	(26,454.26)	(25,601.76)			(26,254.06)
Median (IQR)	15,255.50	7,595.78	18,898.90	10,509.98			11,076.21
	(9,239.85,	(1,938.11,	(6,250.79,	(2,003.91,			(2,993.17,
	21,832.48)	9,889.87)	25,394.00)	22,599.44)			24,299.00)
Range	478.01, 93,521.00	363.09, 92,405.80	531.20, 90,899.68	103.10, 117,515.84			103.10, 117,515.84
Loss-making
Discontinued					5.53	0.14^2
operations, n (%)
0	1 (13%)	1 (17%)	7 (28%)	39 (43%)			48 (37%)
1	7 (88%)	5 (83%)	18 (72%)	51 (57%)			81 (63%)
Big four auditor, n (%)					10.03	0.018^2
0	4 (50%)	5 (83%)	5 (20%)	28 (31%)			42 (33%)
1	4 (50%)	1 (17%)	20 (80%)	62 (69%)			87 (67%)
Avoid loss, n (%)					7.32	0.062^2
0	1 (13%)	4 (67%)	4 (16%)	26 (29%)			35 (27%)
1	7 (88%)	2 (33%)	21 (84%)	64 (71%)			94 (73%)
Avoid earnings decrease, n (%)					0.61	0.89^2
0	3 (38%)	3 (50%)	10 (40%)	32 (36%)			48 (37%)
1	5 (63%)	3 (50%)	15 (60%)	58 (64%)			81 (63%)
Revenue ratio (%)					2.93	0.036^1
Mean (SD)	0.09 (0.07)	0.35 (0.10)	1.06 (0.46)	42.98 (88.13)			30.22 (76.03)
Median (IQR)	0.07 (0.02, 0.16)	0.31 (0.28, 0.41)	0.90 (0.75, 1.40)	12.86 (5.13, 30.18)			6.08 (1.40, 17.42)
Range	0.01, 0.18	0.26, 0.49	0.52, 1.90	2.08, 490.89			0.01, 490.89
Profit or loss from discontinued					0.19	0.90^1
operations (Rm)
Mean (SD)	−35.32 (112.44)	−9.71 (13.10)	−90.79 (157.74)	963.99 (8,487.02)			652.32 (7,093.28)
Median (IQR)	−29.40 (−52.00, −7.25)	−6.16 (−12.14, −1.01)	−76.25 (−132.00, 0.56)	−16.96 (−165.35, 73.83)			−21.21 (−140.32, 27.60)
Range	−254.50, 157.71	−33.84, 1.34	−632.27, 169.53	−2,993.12, 79,253.35			−2,993.12, 79,253.35

¹ One-way ANOVA.

² Pearson’s Chi-squared test.

Table 5. Descriptive statistics based on total assets thresholds (n = 102).

Variables	Sub-minimum threshold n = 16	Component materiality n = 4	Normal materiality n = 9	Clearly material n = 73	Statistic	p-value	Overall n = 102
Firm total revenue (Rm)					0.29	0.83^1
Mean (SD)	27,909.52	13,484.67	23,076.68	20,275.06			21,453.53
	(38,366.79)	(9,233.76)	(22,917.25)	(35,238.77)			(34,034.20)
Median (IQR)	21,720.15	13,924.95	17,134.20	8,346.00			9,635.81
	(8,518.60,	(9,340.44,	(7,954.99,	(1,206.36,			(2,075.59,
	30,569.03)	18,069.18)	30,939.54)	19,656.00)			24,912.90)
Range	1,429.71,	1,953.78,	737.37,	73.29,			73.29,
	163,783.50	24,135.00	76,542.58	163,783.50			163,783.50
Firm total assets (Rm)					2.55	0.060^1
Mean (SD)	33,449.44	11,067.93	36,051.44	18,381.01			22,017.06
	(32,203.44)	(10,262.32)	(32,979.06)	(24,590.83)			(26,961.72)
Median (IQR)	24,579.25	8,878.43	22,459.60	10,385.00			12,051.46
	(7,685.05,	(6,156.45,	(15,390.67,	(1,600.58,			(2,921.43,
	52,045.42)	13,789.90)	68,840.00)	24,299.00)			27,688.53)
Range	776.95, 109,684.00	1,120.86, 25,394.00	1,066.72, 90,899.68	77.13, 117,515.84			77.13, 117,515.84
Loss-making
discontinued					6.92	0.075^2
operations, n (%)
0	2 (13%)	1 (25%)	3 (33%)	34 (47%)			40 (39%)
1	14 (88%)	3 (75%)	6 (67%)	39 (53%)			62 (61%)
Big four auditor, n (%)					4.00	0.26^2
0	7 (44%)	2 (50%)	1 (11%)	20 (27%)			30 (29%)
1	9 (56%)	2 (50%)	8 (89%)	53 (73%)			72 (71%)
Avoid loss, n (%)					3.77	0.29^2
0	4 (25%)	1 (25%)	0 (0%)	22 (30%)			27 (26%)
1	12 (75%)	3 (75%)	9 (100%)	51 (70%)			75 (74%)
Avoid earnings decrease, n (%)					0.93	0.82^2
0	6 (38%)	2 (50%)	4 (44%)	24 (33%)			36 (35%)
1	10 (63%)	2 (50%)	5 (56%)	49 (67%)			66 (65%)
Asset ratio (%)					4.79	0.004^1
Mean (SD)	0.17 (0.14)	0.80 (0.13)	1.51 (0.24)	19.69 (26.67)			14.29 (24.12)
Median (IQR)	0.14 (0.06,	0.83 (0.73, 0.90)	1.52 (1.27, 1.62)	9.22 (4.45,			4.66 (1.55,
	0.23)			24.12)			15.70)
Range	0.01, 0.47	0.63, 0.91	1.24, 1.99	2.06, 128.42			0.01, 128.42
Profit or loss from
discontinued					0.19	0.91^1
operations (Rm)
Mean (SD)	-202.33 (519.36)	-35.52 (66.05)	-2.16 (897.73)	1,202.89 (9,405.86)			827.57 (7,970.73)
Median IQR)	−66.49 (111.93, −25.55)	−12.07 (−49.90, 2.31)	−122.35 (−193.41, 7.70)	−1.61 (−148.32,79.23)			−13.47 (−147.36, 48.88)
Range	−2,096.73, 143.00	−132.00, 14.08	−1,123.90, 2,164.00	−2,993.12, 79,253.35			−2,993.12, 79,253.35

¹ One-way ANOVA.

² Pearson’s Chi-squared test.

Figure 2. Box plots of the revenue ratios of the bottom three revenue materiality threshold categories (n=39).

Figure 3. Box plots of the total asset ratios of the bottom three asset materiality threshold categories (n=29).

Figure 4. Frequency plots of materiality thresholds by loss-making discontinued operations.

Figure 5. Frequency plots of materiality thresholds by firms audited by a Big Four auditor.

Figure 6. Frequency plots of materiality thresholds by firms that avoid losses

Figure 7. Frequency plots of materiality thresholds by firms that avoid an earnings decrease.