Fasb Offers New Guidance For Reporting On Discontinued Operations 2

Defining, Accounting, & Reporting For Discontinued Operations

Contingent liabilities related to discontinued operations are debts assumed by the buyer of a discontinued operation. These amounts are calculated by determining the net selling prices and carrying amounts of net assets, which are expected to be sold after the operation is sold. Financial statements must include separate line items for discontinued operations and detailed disclosures in the notes. In accordance with IAS 1 Presentation of Financial Statements, companies must include line-item disclosures of their liabilities related to discontinued operations. Your discontinued operation will result in a gain or loss during the accounting period it flew the accounting coop.

A significant shift in operations

Contingent liabilities related to discontinued operations are also considered to be discontinued operations. However, there is no definitive definition of what constitutes a Fasb Offers New Guidance For Reporting On Discontinued Operations discontinued operation. In this article, we will cover the various aspects of the topic, including reporting discontinued operations on the income statement. Disclosure of the pretax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting also is required by the new guidance. Financial statement users will be able to review this disclosure to get information about the ongoing trends in an organization’s results from continuing operations.

• GAAP closer to IFRS because part of the new definition of discontinued operations is based on elements of the definition in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.
• Both frameworks aim to separate the results of discontinued operations from continuing operations, providing a clearer picture of a company’s ongoing performance.
• According to FASB, some stakeholders have criticized the rule for casting too wide of a net.
• This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
• However, the new standard makes the process easier, and it provides for additional disclosures in footnotes.

Discontinued Operations Examples

The Securities and Exchange Commission (SEC) plays a vital role in overseeing the financial reporting of publicly traded companies in the United States. Recognizing the need for greater comparability, there have been ongoing efforts to converge IFRS and U.S. While complete convergence has not been achieved, the IASB and FASB continue to collaborate on projects aimed at reducing differences in accounting standards. The new standard is effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014.

Disclosure Requirements for Public Companies

Costs to sell are the incremental, direct costs from the disposal, such as broker commissions or legal fees. A consequence of this classification is that depreciation and amortization on the long-lived assets within the component must cease. Although this high-level look at discontinued operations and accepted accounting principles should be a tremendous help, always remember to review the actual guidance itself for any nooks and crannies that might pertain to you.

• The guidance is to be applied prospectively to all new disposals of components and new classifications as held for sale beginning in 2015 for most entities, with early adoption allowed in 2014.
• A component classified as held for sale is measured at the lower of its carrying amount or its fair value less costs to sell.
• 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 insight gained from these regulatory guidelines informs critical decision-making processes, ensuring transparency and accountability in financial reporting.

The company must also disclose the gain or loss recognized on the disposal and provide a detailed reconciliation of the major line items making up the net income of the discontinued operation, such as revenue and cost of sales. So, next time you’re glancing over a company’s financials, don’t just skip past that “discontinued operations” section on the income statement! It can offer some valuable insights into the company’s strategic shifts and overall performance. Understanding how discontinued operations impact the income statement provides a clearer picture of what’s really going on.

As objective third parties, auditors rigorously examine the underlying documentation, assumptions, and calculations supporting the financial disclosures. Discontinued operations represent a strategic shift, whether for portfolio or valuation purposes. Analysts use the data provided to remove non-continuing operations in order to see the true performance of the company in its current form.

3 Criteria for reporting discontinued operations

Their audit procedures are designed to detect material misstatements, whether intentional or unintentional, that could mislead stakeholders. It could also be part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations. CPA Practice Advisor is the definitive technology and practice management resource for accounting and tax professionals.

Summary of Topic

And companies still have to give thoughtful consideration to what the FASB means by “strategic shift.” Does the company’s board view the disposal as indicative of an overhaul? Would giving it the heave-ho signify a big change in the direction for the company and be something investors would really want to know about? While the answers are going to vary from company to company, how any one company interprets the guidance should be consistent and well documented. One of the most controversial aspects of this new standard is determining which operations qualify as discontinued. However, the new standard makes the process easier, and it provides for additional disclosures in footnotes. The new standard also eliminates the need for a separate line item for each discontinued operation.

Reporting discontinued operations on income statement

And as always, if you need a helping hand to guide the way, Embark is at the ready to lend you our expertise. That isn’t to say that discontinued operations are a migraine waiting to happen, though. Like most things in the big ol’ financial accounting world, when you understand the guidance behind them, you make your accounting team’s collective life much easier.

Another significant improvement in the new guidance is the timing of disclosure—just because a company has continuing involvement with a disposed component doesn’t mean it has to put off reporting it as a discontinued operation. Presenting discontinued operations in the financial reports needs compliance with stringent accounting standards. Beyond the definition, FASB also dictates how discontinued operations should be measured and disclosed. Companies must separately present the results of discontinued operations, including any gain or loss from the disposal. It’s also important to understand that, if the disposal occurred in the current year, all prior periods presented must be reclassified to reflect the discontinued operations separately.