Fewer disposals are expected to be reported as "discontinued operations" under new guidance.
The definition of a discontinued operation has changed significantly:
Companies planning to sell or spin-off part of their business should take note of recent changes to the threshold for “discontinued operations” reporting. The revised definition will require new judgment, and fewer disposals are expected to meet the threshold. As a result of these changes, management should be prepared for questions from stakeholders about disposals, especially those that do not qualify for discontinued operations reporting.
The new focus on “strategic shift” and “major effect” means the assessment of whether a disposal is a discontinued operation will be company-specific and require judgment. The guidance provides no specific definition of these terms beyond their plain English meanings, but it includes some examples, such as the disposal of a major geographical area of operations or a major line of business. Unlike the old rules, the new guidance doesn’t specifically preclude discontinued operations treatment when the company will continue to be involved with the disposed-of component. However, continuing relationships could affect the assessment of whether a strategic shift has occurred.
Operating results of disposals that qualify as discontinued operations will continue to be shown separately from continuing operations on the face of the financial statements for all periods presented. The guidance also includes expanded disclosure and presentation requirements for discontinued operations, including disclosures about the major financial statement line items comprising pretax profit or loss of the component and cash flow information.
Recognizing that fewer disposals will be presented as discontinued operations, the guidance also requires new disclosures about significant disposals that don’t meet the revised threshold. These requirements include disclosing pretax profit or loss of the disposed-of component. Identifying which disposals are “significant” and require disclosure is again subject to judgment.
Because the impact of these disposals will not be evident on the face of the financial statements, some investors may be looking for more information about their impact on ongoing operating results, beyond the required disclosures. Management should be prepared for these questions, and may want to consider whether and how to provide additional transparency, keeping in mind the reporting requirements for any information that represents a “non-GAAP” measure.
To have a deeper discussion of how the discontinued operations guidance might affect your company, please contact:
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