A higher bar for reporting discontinued operations (Observations from the front lines)

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07/10/2013 by US Capital Markets and Accounting Advisory Services
A higher bar for reporting discontinued operations (Observations from the front lines)

At a glance

The FASB issued a proposal to change the criteria and reporting requirements for discontinued operations while adding new disclosures for individually material dispositions that do not qualify as discontinued operations. Companies should consider how the proposed standard impacts their communication plan to investors.

Observations from the front lines provides PwC's insight on current economic issues, our perspective regarding the business impacts, and actions we have seen companies taking to effectively address those issues.

On April 2, 2013, the FASB issued a proposal that changes the criteria for reporting discontinued operations, enhances the disclosure requirements for discontinued operations, and adds new disclosures for individually material dispositions that do not qualify as discontinued operations. The proposed draft aims to address concerns that (i) too many disposals of assets qualify for discontinued operations presentation, and (ii) the assessment of continuing involvement is difficult to apply in practice.

The result of these concerns has led to financial statements that are not decision-useful for users, are unnecessarily costly for preparers, and contain inconsistent application of key provisions. Consequently, the proposed changes are intended to both ensure that only disposals that represent major strategic shifts in the business are reported as discontinued operations and achieve greater consistency in the application of GAAP.

Highlights in this issue:

  • Proposed changes to GAAP potentially raise the bar on discontinued operations reporting
  • Reporting discontinued operations will require a company to have a significant strategic shift in the business as a result of the transaction
  • Companies will have more flexibility to structure deals with buyers to include post-deal involvement, while still being able to report discontinued operations
  • Companies will want to consider how the proposed standard impacts their communication plan to investors for qualifying transactions