FASB releases simplified reporting rules for discontinued operations

The Financial Accounting Standards Board (FASB) released revised guidance for financial reporting on discontinued operations in April 2014. The new rules directly respond to concerns that too many disposals of assets, including small groups of assets that are recurring in nature, qualify for discontinued operations, and that the guidance for applying the current definition of a discontinued operation is complicated to interpret and apply.

The guidance, found in Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, redefines “discontinued operation” so that disposal activity is only presented in discontinued operations in financial statements when it constitutes a “strategic shift” in the company’s operations. Other amendments require enhanced disclosures about a company’s discontinued operations and individually significant components that have been or will be disposed of.

The guidance should be applied by public entities to:

  1. All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years.
  2. All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years.

The guidance should be applied by most nonpublic organizations to:

  1. All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015.
  2. All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015.

Early application is permitted for disposals (or classifications as held for sale) that have not been reported in financial statements that were previously issued or available for issuance.

The existing rules

Under current US GAAP, a company must include the results of operations of a component that has been disposed of or is classified as held for sale in the discontinued operations presentation of its financial statements, if both of the following conditions are satisfied:

  • The component’s operations and cash flows have been or will be eliminated from the company’s ongoing operations as a result of the disposal transaction.
  • The company will not have significant continuing involvement in the component’s operations after the disposal transaction.

Discontinued operations could include a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group.

Reporting under the new guidance

Under ASU 2014-08, discontinued operations reporting is limited to disposals of components of a company (or a business or nonprofit activity) that represent a strategic shift that has or will have a major effect on the company’s operations and financial results. The guidance cites several examples of a qualifying strategic shift, including a disposal of a major geographic area, a major line of business or a major equity method investment. If a strategic shift occurs, the company must present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position.

Enhanced disclosure requirements

The new guidance requires expanded disclosures to provide financial statement users with more information about the assets, liabilities, revenues and expenses of discontinued operations. Unless otherwise indicated below, the disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement. The expanded disclosures include:

  • The major classes of line items constituting the pretax profit or loss of the discontinued operation. Major line-item classes include revenue, cost of sales, depreciation and amortization, and interest expense.
  • Either:
    • The total operating and investing cash flows of the discontinued operation, or
    • The depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation.
  • The pretax profit or loss attributable to the parent. This applies if the discontinued operation includes a noncontrolling interest.
  • The carrying amounts of the major classes of assets and liabilities included as part of a discontinued operation classified as held for sale. This disclosure is for the period in which the discontinued operation is so classified, as well as all prior periods presented in the statement of financial position.
  • A reconciliation of:
    • The major classes of the discontinued operation’s assets and liabilities classified as held for sale that are disclosed in the financial statement notes to the total assets and total liabilities of the disposal group classified as held for sale that are presented separately on the statement of financial position.
       
      This must be done for the initial period in which the disposal group is so classified and all prior periods presented in the statement.
  • A reconciliation of:
    • The major classes of line items constituting the discontinued operation’s pretax profit or loss that are disclosed in the notes to the discontinued operation’s after-tax profit or loss that is presented on the income statement.

ASU 2014-08 also increases the required disclosures about a company’s significant continuing involvement with a discontinued operation, including the amount of any cash inflows or outflows from or to the discontinued operation following its disposal and information about a discontinued operation in which an entity retains an equity method investment after the disposal.

In addition, the guidance requires disclosures for disposals that do not qualify for discontinued operations reporting in certain circumstances. When a company disposes of a significant component of the company but the disposal does not qualify for discontinued operations reporting, it must disclose the pretax profit or loss attributable to the component. Public companies and not-for-profit entities that have issued, or are conduit bond obligors for, most securities are subject to additional disclosure requirements when they dispose of individually significant components that do not qualify for discontinued operations presentation.

The new guidance is intended to provide more decision-useful information to users and should mean that fewer disposals will need to be presented as discontinued operations, likely having the greatest impact on entities that enter into routine disposal transactions, such as those in the real estate or retail industries.

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