OUR THOUGHTS ON:

Discontinued Operations Guidance Gets Overhaul

Audit

By Joe Bruce

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment:  Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  The amendments in the ASU change the criteria for reporting discontinued operations and also enhance the disclosures in this area. 

The FASB elected to make the amendments after stakeholders complained that too many disposals of small groups of assets that are recurring in nature qualify for discontinued operations under current guidance.  Additionally, stakeholders noted that the current guidance resulted in higher costs for preparers, because the guidance can be complex and difficult to apply.  Finally, the amendments enhance the convergence efforts in this area between the FASB and the International Accounting Standards Board (IASB).

Discontinued Operations Reporting

The main provision of the new guidance is that a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs:

  • The component of an entity or group of components of an entity meets the criteria to be classified as held for sale.
  • The component of an entity or group of components of an entity is disposed of by sale.
  • The component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution).

Examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of the business.

The amendments in the ASU require an entity to 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.  Additionally, the amendments in the ASU require additional disclosures about discontinued operations, including:

  • The major classes of line items constituting the pretax profit or loss of the discontinued operation for the periods in which the results of operations of the discontinued operation is reported.
  • The total operating and investing cash flows of the discontinued operation for the periods in which the results of operations of the discontinued operation are reported.
  • A reconciliation of the major classes of assets and liabilities of the discontinued operation classified as held for sale to the total assets and total liabilities presented in the statement of financial position.
  • A reconciliation of the major classes of line items constituting the pretax profit or loss of the discontinued operation to the after-tax profit or loss presented where net income is reported.

The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year-ends.  For most nonpublic organizations, it is effective for annual statements with fiscal years beginning on or after December 15, 2014.  Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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