Selling part of your business? New rules for reporting disposals

09/22/2014

Download: Selling part of your business? New rules for reporting disposals

Fewer disposals are expected to be reported as "discontinued operations" under new guidance.

What you need to know about new rules for reporting disposals

  • New accounting guidance is expected to reduce the number of disposals that are separately presented as “discontinued operations” in the financial statements.
  • The historical results of disposals that are not discontinued operations will not be evident on the face of the financial statements, in the segment footnote, or in the five-year selected financial data table.
  • Investors may want more information about disposals to provide transparency into a company’s ongoing operating results and to facilitate trend analysis.
  • The new rules are effective in 2015, but can be adopted earlier and applied to disposals in 2014.

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.

Identifying discontinued operations requires new judgment

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.

Will the new guidance leave investors wanting more?

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.

How PwC can help

To have a deeper discussion of how the discontinued operations guidance might affect your company, please contact:

Beth Paul
973 236 7270
elizabeth.paul@us.pwc.com

Chad Kokenge
646 471 4684
chad.a.kokenge@us.pwc.com