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FASB revises reporting requirements for discontinued operations

The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-08 which lays out new guidance for financial reporting on discontinued operations.  The new rules will reduce the number of asset disposals that companies must present as discontinued operations in their financial statements.  However, companies must expand the disclosures that are required when discontinued operations are reported.  The new guidance 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

Currently, 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, and
  • The company won’t have any significant continuing involvement in the component’s operations after the disposal.

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

Under the existing guidance, there was a concern that too many disposals of assets qualified for discontinued operations presentation, including routine disposals of small groups of assets.

New Reporting Requirements

Under the new guidance issued by the FASB, 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.

Expanded disclosures

To provide financial statement users with more information about the assets, liabilities, revenues and expenses of discontinued operations, the new guidance requires expanded disclosures.  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.
  • 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 operations.
    • The pretax profit or loss attributable to the parent.  This applies if the discontinued operation includes a controlling interest.
    • The carrying amounts of the major classes of assets and liabilities included as part of a discontinued operation classified as held for sale.

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 does not qualify for discontinued operations reporting.

Effective date

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 December 15, 2014.  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.

If you have any questions regarding this issue, please contact us.

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