The FASB revised the threshold for reporting a discontinued operation and changed many disclosures about disposals.
On April 10, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements.
New definition of a discontinued operation
Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.”
The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the standard provides examples of when a disposal qualifies as a discontinued operation.
A business or nonprofit activity that upon acquisition qualifies as held for sale will also be a discontinued operation.
The standard no longer precludes presentation as a discontinued operation if (i) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations, or (ii) there is significant continuing involvement with a component after its disposal.
The standard introduces several new disclosures, some of which are described below.
An entity is required to present in the statement of cash flows or disclose in a note either (i) total operating and investing cash flows for discontinued operations, or (ii) depreciation, amortization, capital expenditures, and significant operating and investing noncash items related to discontinued operations.
Additional disclosures are required when an entity retains significant continuing involvement with a discontinued operation after its disposal, including the amount of cash flows to and from a discontinued operation.
For disposals of individually significant components that do not qualify as discontinued operations, an entity must disclose pre-tax earnings of the disposed component.
Balance sheet presentation
An entity must 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.
The guidance applies to all entities that dispose of components and, in some cases, is expected to result in fewer disposals being presented as discontinued operations. It will significantly change current practice for assessing discontinued operations and affect an entity’s income and earnings per share from continuing operations.
Evaluating whether a disposal represents a strategic shift will require significant judgment. Complexity should be reduced, however, by the elimination of the current requirements to assess whether a component’s operations and cash flows have been eliminated from the ongoing entity and the significance of continuing involvement with a disposed component.
The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities (and not-for-profit entities that issue securities or are conduit bond obligors) in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. It is effective for all other entities in annual periods beginning on or after December 15, 2014, and interim periods beginning on or after December 15, 2015.
However, all entities may early adopt the guidance for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. This means, for example, that calendar year-end entities can apply the amended definition to new disposals beginning in the first quarter of 2014, provided their interim financial statements have not been issued or made available for issuance before the release of this standard.
We plan to issue a Dataline publication in the near term that will include more details, observations, and implementation guidance about the new standard.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the National Professional Services Group.
Matthew L. Brenner