Did your company undergo a major strategic shift in 2016? If so, management may need to comply with the updated rules for reporting discontinued operations that went into effect in 2015 for most companies. Discontinued operations typically don’t happen every year, so it’s important to review the basics before preparing your year-end financial statements.
Narrower definition of discontinued operations
Under Accounting Standards Update (ASU) No. 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 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 balance sheet.
To provide financial statement users with more information about the assets, liabilities, revenue and expenses of discontinued operations, the new guidance also requires expanded disclosures. The following expanded disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:
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.
One of the following: Either 1) the total operating and investing cash flows of the discontinued operation, or 2) 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.
Management also must provide various disclosures and reconciliations of items held for sale for the period in which the discontinued operation is so classified and for all prior periods presented in the statement of financial position. Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation — or if a disposal doesn’t qualify for discontinued operations reporting.
Which rules to apply?
Unsure whether a disposal qualifies as a discontinued operation under the updated rules? Reporting disposals can be confusing and time-consuming. We can help you understand the new, simpler discontinued operations guidance, which, if applicable, could streamline your reporting process.