On April 2, 2013, the FASB (the “board”) issued a proposal that changes the criteria for reporting discontinued operations. The proposal also enhances disclosure requirements for discontinued operations and adds new disclosures for individually material dispositions that do not qualify as discontinued operations.
Financial statement presentation
Under the proposal, a discontinued operation is a component of an entity, or group of components of an entity, that either has been disposed of, or is classified as held for sale1, and:
Currently, a discontinued operation is a component of an entity that comprises operations and cash flows that can be clearly distinguished. A component could range from an asset group to a reportable segment.
The proposal provides limited examples of what constitutes a major line of business and major geographical area of operations.
The proposal no longer precludes presentation as a discontinued operation if (a) there is significant continuing involvement with the component after the disposal or (b) there are operations and cash flows of the component that have not been eliminated from ongoing operations. In addition, an equity method investment may also now qualify as a discontinued operation.
Given the expectation that less disposals will qualify as discontinued operations under the proposed guidance, the board decided to require new disclosures about disposals of individually material components that are not presented as discontinued operations. These disclosures include pretax profit or loss of the disposed component and a reconciliation of the component’s major classes of assets and liabilities held for sale to the amounts presented separately on the face of the statement of financial position. Nonpublic entities will be exempt from some of these disclosure requirements.
For discontinued operations, an entity will be required to disclose a reconciliation of both the component’s pretax profit or loss and major income and expense items to the after-tax income or loss from discontinued operations shown on the face of the income statement. Entities must also provide a reconciliation of the major classes of assets and liabilities held for sale to the amounts presented separately on the face of the statement of financial position, and disclose cash flows by category.
When an entity has continuing involvement with a discontinued operation following a disposal, the proposal requires disclosure of the amount of cash flows to and from the discontinued operation. If an entity retains an equity method investment after the disposal, the entity must disclose (a) its ownership interest before and after the disposal transaction and (b) income or loss from its ongoing equity method investment in the discontinued operation, and the line item in which it is presented.
This proposal will align the threshold for determining whether a disposition should be presented as a discontinued operation with the guidance in IFRS. However, the unit of account used to assess a discontinued operation under IFRS is a cash-generating unit compared to a component (or group of components) of an entity under US GAAP. Also, several of the proposed disclosures are beyond those required under IFRS.
The project will affect companies that either dispose of a component or classify a component as held for sale. Companies that frequently engage in divestitures, such as those in the real estate industry, will be most affected.
The FASB will consider constituent feedback before determining an effective date. The guidance will be applied prospectively to new dispositions (and new classifications as held for sale) that occur after the effective date. Early adoption will be permitted.
Comments on the FASB's proposal are due by August 30, 2013.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Business Combinations team in the National Professional Services Group (1-973-236-7801)
1The “held for sale” criteria are outlined in ASC 360-10-45-9.
Lawrence N. Dodyk