Fasb Offers New Guidance For Reporting On Discontinued Operations 1

New discontinued operations guidance de-clutters reporting

They complained that too many disposals of assets qualified for discontinued operations presentation, including routine disposals of small groups of assets. 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.

FASB Provides Guidance on Reporting Discontinued Operations

Companies don’t need to reclassify discontinued operations every year, but it’s a good idea to revisit them before year-end financial statements are prepared. For example, a company may close a branch because its product is no longer selling or it is no longer profitable. The income statement, a cornerstone of financial reporting, provides a crucial snapshot of a company’s financial performance over a specific period.

FASBs’ Proposed Accounting Standard Update (ASU) (Sub-topic 470-

Aside from that high-level look at discontinued operations and your income statement, there are a few other considerations to keep in mind that, once again, can be helpful to the folks in your accounting department. This information must be clearly segregated within the income statement to provide investors with a clear understanding of the ongoing profitability of the remaining business. Furthermore, accountants and controllers must remain abreast of evolving accounting guidance and regulatory pronouncements. Changes in accounting standards can necessitate adjustments to reporting practices, requiring continuous professional development and a proactive approach to compliance. The principle of materiality plays a crucial role in determining whether a business component qualifies for this treatment.

Recognizing Impairment: Protecting Against Overstated Assets

Furthermore, FASB requires detailed disclosures about the nature of the discontinued operation, the manner of disposal, and the expected timeline. Specifically, FASB Accounting Standards Codification (ASC) , Presentation of Discontinued Operations, provides comprehensive guidance. This standard meticulously defines what qualifies as a discontinued operation, setting clear criteria for consistent application. Auditor scrutiny enhances the credibility of financial reporting and reinforces stakeholder trust.

Understanding Discontinued Operations: An Income Statement Deep Dive

Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s Fasb Offers New Guidance For Reporting On Discontinued Operations operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. According to FASB, some stakeholders have criticized the rule for casting too wide of a net.

How is a discontinued operation presented on the income statement?

• Companies are required to present both basic and diluted EPS figures for income from continuing operations and for discontinued operations, separately.
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• Accountants and controllers stand as the primary internal guardians of financial reporting accuracy.
• A crucial aspect of accounting for discontinued operations is the assessment for impairment.
• It is up to the discretion of the preparer to show if an operation or component of an entity, no matter how big, is material.

These disclosures include a description of the discontinued operation, the date of disposal or classification as held for sale, the carrying amount of assets and liabilities, and the method of disposal. The cornerstone of accounting for discontinued operations rests on the accurate measurement of assets designated as “held for sale.” The primary objective is to reflect these assets at their fair value, less costs to sell. The hallmark of discontinued operations reporting lies in its segregation from continuing operations. This separation is paramount to avoid distorting the assessment of ongoing business performance. What this means is the new guidance provides a lighter financial-reporting burden when small divestitures occur. This is a rare “phew” finance teams rarely feel after seeing new accounting guidance.

• However, since many discontinued operations are disposed of at a loss, you could very well realize a future benefit on your corporate income taxes.
• It’s a fast entry into a market you’ve long wanted to explore, and this acquisition is too tempting to pass up.
• The current and prior period results of operations of the component, which meets the criteria of discontinued operations, are presented separately.
• Aside from that high-level look at discontinued operations and your income statement, there are a few other considerations to keep in mind that, once again, can be helpful to the folks in your accounting department.
• PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.

The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations. Both ASC , Presentation of Financial Statements — Discontinued Operations under USGAAP and IFRS 5, Non-current Assets Held for Sale and Discontinued Operations under IFRS, provide guidance on reporting of discontinued operations.

Income Statement Presentation

Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The “costs to sell” component includes direct incremental costs that are directly attributable to the disposal of the asset, such as brokerage commissions, legal fees, and advertising expenses. This oversight is crucial for maintaining investor confidence and preventing fraudulent financial reporting.

First and foremost, remember that it’s crucial to separate your discontinued operations from your ongoing operations with new line items on your income statement. This way, anyone looking at your financials can easily distinguish between the cash flows and profits from your continuing operations and those from the disposals. The profit or loss from discontinued operations, net of tax, must be presented as a separate line item in the income statement. This segregation allows users of financial statements to isolate the financial impact of the discontinued operation from the company’s ongoing operations. The accounting for discontinued operations requires meticulous attention to detail, particularly concerning the measurement of assets held for sale, potential impairment losses, and meticulous adherence to financial reporting standards.

The insights derived from discontinued operations disclosures significantly influence decision-making processes, from internal strategic adjustments to external investment allocations. This requirement enables stakeholders to assess the trend in the performance of both continuing and discontinued operations over time, facilitating a more informed analysis of the company’s financial performance and strategic decisions. Companies must disclose the income tax expense or benefit related to both the profit or loss from operations and the gain or loss on disposal. This disclosure ensures that stakeholders can accurately assess the after-tax impact of the discontinued operation on the company’s overall earnings. Building upon the foundational understanding of what constitutes discontinued operations, it’s crucial to examine how these activities are presented within the income statement. The specific line items and their placement offer essential clues for interpreting a company’s overall financial health and profitability.

PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Let’s start with something simple to better define the concept of a strategic shift. You’re a hotel operator that’s expanding your footprint through acquisitions, targeting a smaller chain of economy-class hotels spread across the lovely Southwestern United States. It’s a fast entry into a market you’ve long wanted to explore, and this acquisition is too tempting to pass up. No other association in the business valuation or financial litigation profession provides the wealth and depth of resources like NACVA.