In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity that changed the requirements for reporting discontinued operations. Under the new standards, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Examples of a strategic shift could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity.
Prior to this ASU, the operating results of a component of an entity that is classified as held for sale or that has been disposed of is presented in discontinued operations if the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the component’s operations. These conditions have been removed as a result of the ASU. Accordingly, continuing involvement in the operations of the component after the disposal transaction will no longer preclude presentation in discontinued operations.
This ASU is expected to result in fewer disposals being reported in discontinued operations, as previously many were routine in nature and not a change in an entity’s strategy. Going forward, these disposals will be included within continuing operations of the entity so long as the disposal does not represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results. Accordingly, under the new standards, there will still be judgment that needs to be made regarding whether a disposal qualifies as a strategic shift and, thus, is required to be included in discontinued operations.
In addition to the new conditions for discontinued operations reporting in the ASU, the amendments will require certain presentation changes and expanded disclosures for discontinued operations. Furthermore, entities will also have to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting.
For private companies, the amendments in the ASU should be applied prospectively to 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.The amendments should not be applied to components that are classified as held for sale before the effective date even if the component is disposed of after the effective date. However, early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.
For further understanding of the changes as a result of the ASU as well as specific examples on disposals of groups of components of an entity that meet the new requirements, the entire ASU is available for viewing at www.fasb.org.
By Jonathan Poppel, CPA