The Financial Accounting Standards Board (FASB) has issued guidance that lays out new rules for financial reporting on discontinued operations. The rules reduce the number of asset disposals that companies must present as discontinued operations in their financial statements. But they also expand the disclosures that are required when discontinued operations are reported.
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, is intended to help ensure that financial statements faithfully represent a company’s discontinuation of operations while reducing cost and complexity for financial statement preparers.
Current GAAP requirements
Existing Generally Accepted Accounting Principles (GAAP) require a company to include in the discontinued operations presentation of its financial statements the results of operations of a company component that has been disposed of or is classified as held for sale, if both of the following conditions are met:
- 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, and
- The company won’t have any significant continuing involvement in the component’s operations after the disposal transaction.
Discontinued operations under existing GAAP could include a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group.
According to FASB, some stakeholders have criticized the rule for casting too wide of a net. They complained that too many disposals of assets qualified for discontinued operations presentation, including routine disposals of small groups of assets. The resulting financial statements are “less decision useful.” Other stakeholders have pointed out that the guidance for applying the current definition of a discontinued operation, which includes extensive implementation guidance and illustrations, can be complex to apply.
The new reporting requirement
Under the new guidance found in ASU 2014-08, disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results. A component comprises operations and cash flows that can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the company. It could still be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group.
Examples of a qualifying strategic major shift include disposal of a major geographic area, a line of business or an equity method investment. When such a strategic shift occurs, a 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 of the statement of financial position.
To provide financial statement users with more information about the assets, liabilities, revenues and expenses of discontinued operations, the new guidance requires expanded disclosures. Except where otherwise indicated below, the disclosures are 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. Examples of major line-item classes include revenue, cost of sales, depreciation and amortization, and interest expense.
- 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 operations.
- 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 is for the period in which the discontinued operation is so classified and 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, with
- 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 for 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, with
- The discontinued operation’s after-tax profit or loss that is presented on the income statement.
The guidance also expands the required disclosures about a company’s significant continuing involvement with a discontinued operation.
In addition, the new guidance requires a disclosure when a company sheds a significant part of the organization but the disposal doesn’t qualify for discontinued operations reporting. The disclosure of the pretax income attributable to such a disposal is intended to provide users with information about the ongoing trends in a company’s results from continuing operations.
The guidance requires additional disclosures for public companies that have issued, or are conduit bond obligors for, most securities when they dispose of individually significant components that don’t qualify for discontinued operations presentation.
Alignment with international standards
The revisions to the definition of “discontinued operation” — requiring a disposal to cause a strategic shift with a major effect on the company’s operations and financial results — make the GAAP definition similar to the definition used in the International Financial Reporting Standards (IFRS). The disclosures required in the notes to financial statements for disposal of individually significant components that don’t qualify for discontinued operations reporting, however, aren’t required under IFRS.
The guidance takes effect in the first quarter of 2015 for public organizations with calendar year ends. It takes effect for most nonpublic organizations for annual financial statements with fiscal years beginning on or after Dec. 15, 2014. Early application is permitted for disposals (or classifications as held for sale) that haven’t been reported in financial statements that were previously issued or available for issuance.