A Push for Fewer Discontinued Operations
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Starting as a short-term convergence project with the International Accounting Standards Board in 2006, the end result was a multiyear effort to identify what events truly should qualify as a discontinued operation. The ASU changes the criteria for reporting a discontinued operation, which should reduce the number of items reported below income from continuing operations. Also, the ASU reduces the implementation guidance while increasing disclosure requirements.
One criticism about the previous guidance was that too many items, including routine asset sales, qualified as discontinued operations. The new guidance indicates that in order to qualify as a discontinued operation, the disposal must include a strategic shift that has a major effect on the entity’s operations and financial results. The Implementation Guidance and Illustrations section of the codification includes a list of items that could qualify as strategic shifts, including the sale of a major product line, exiting from a major geographic area or disposing of a major equity method investment. Accounting Standards Codifications 205-20-55-83 through 55-101 provide examples of strategic shifts that have a major effect. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. Discontinued operations treatment should be used when the component is held for sale, disposed of by sale, or disposed by a means other than sale. In addition, the ASU removes the current guidance that indicates that in order to qualify for discontinued operations treatment, operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity.
While prior guidance required only adjustments to the income statement, the ASU now requires the presentation of the assets and liabilities of a disposal group separately in the asset, and liability sections of the balance sheet.
Some of the additional disclosures include:
- The pretax profit or loss of the discontinued operation;
- The major classes of line items constituting the pretax profit or loss of the discontinued operation;
- Either of the following:
- 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; and
- The carrying amount(s) of the major classes of assets and liabilities included as part of a discontinued operation classified as held for sale.
In addition, if an item does not qualify for discontinued operations but represents a disposal of an individually significant component, then the entity should also disclose the pretax profit or loss attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale.
Public business entities also have additional disclosures above those required for private entities.
For Public Business Entities (and NFPS with conduit bond obligations for securities issued on an OTC exchange):
- 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.
- 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.
All other entities:
- The effective date is the same, except that the interim reporting would be required for annual periods beginning on or after December 15, 2015.
The ASU permits early adoption, however only for those disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.