The FASB completed redeliberations and voted to issue a final standard that will change criteria for determining which disposals are presented as discontinued operations.
On November 13, 2013, the FASB (the “board”) completed its redeliberations and voted to issue a final standard that will change the criteria for determining which disposals are presented as discontinued operations.
Definition of a discontinued operation
The board agreed to amend the current definition of a discontinued operation, but made several modifications to the proposed definition that it exposed for comment in April.
The revised definition of a discontinued operation will be “a component or group of components that has been disposed of or is classified as held for sale, together as a group in a single transaction,” and “represents a strategic shift that has (or will have) a major effect on an entity’s financial results.” The board agreed that a strategic shift includes “a disposal of (i) a separate major line of business, (ii) a separate major geographical area of operations, or (iii) a combination of parts of (i) or (ii) that make up a major part of an entity’s operations and financial results.”
A business that, upon acquisition, qualifies as held for sale will also be a discontinued operation.
Additional examples will be provided to illustrate the types of disposals that constitute a major strategic shift in operations. The examples are intended to clarify that a disposal of less than an entire major line of business or entire major geographical area of operations may represent a strategic shift in operations that has or will have a major effect on an entity’s results.
The board also reaffirmed its decision to no longer preclude presentation as a discontinued operation if (a) there is significant continuing involvement with a component after its disposal, or (b) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations.
Entities will need to disclose operating and investing cash flows for discontinued operations, but the board decided against disclosing financing cash flows. This will represent a significant and potentially challenging change for many entities.
The board agreed to require additional disclosures when an entity retains significant continuing involvement with a discontinued operation after its disposal, including a new disclosure of cash flows to/from a discontinued operation.
For disposals of individually material components that do not qualify as discontinued operations, the board decided to require disclosures of pre-tax profit or loss of the disposed component and the amount attributable to the parent if there is a noncontrolling interest.
While the board reaffirmed its decision that an equity method investment may be a discontinued operation, it decided against requiring all of the disclosures required for other discontinued operations unless the entity previously determined it was necessary to disclose detailed financial information about the equity investment prior to its disposal.
Balance sheet presentation
To improve comparability, the board decided to require entities to reclassify the assets and liabilities of a discontinued operation that are classified as held for sale or disposed of in the current period for the comparative periods presented in the statement of financial position. Current guidance neither requires nor prohibits this presentation.
The guidance will be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.
The guidance will affect the financial statement presentation and disclosure of dispositions and assets held for sale for entities across all industries.
Public entities will be required to apply the guidance in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Nonpublic entities will be required to apply the guidance within annual periods beginning on or after December 15, 2014, and interim periods thereafter. Early adoption will be permitted for all entities.
The FASB expects to issue a final Accounting Standards Update in early 2014. PwC will provide further details and observations in a Dataline after the final standard is released.
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).
Lawrence N. Dodyk