FASB Offers New Guidance for Reporting on Discontinued Operations
Another significant improvement in the new guidance is the timing of disclosure—just because a company has continuing involvement with a disposed component doesn’t mean it has to put off reporting it as a discontinued operation. Presenting discontinued operations in the financial reports needs compliance with stringent accounting standards. Beyond the definition, FASB also dictates how discontinued operations should be measured and disclosed. Companies must separately present the results of discontinued operations, including any gain or loss from the disposal. It’s also important to understand that, if the disposal occurred in the current year, all prior periods presented must be reclassified to reflect the discontinued operations separately.
Companies are Fasb Offers New Guidance For Reporting On Discontinued Operations permitted to transition to the new standard early, before the December 15th, 2016 effective date, and to do so on an interim basis within an annual reporting period. The company is currently evaluating how best to implement the new standard and the potential impact. A crucial aspect of accounting for discontinued operations is the assessment for impairment.
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- Changes in accounting standards can necessitate adjustments to reporting practices, requiring continuous professional development and a proactive approach to compliance.
- The new standard is effective in the first quarter of 2015 for public organizations with calendar year ends.
- A discontinued operation represents a component of an entity that has either been disposed of or is classified as held for sale, meeting specific criteria.
- For example, a company may close a branch because its product is no longer selling or it is no longer profitable.
PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Let’s start with something simple to better define the concept of a strategic shift. You’re a hotel operator that’s expanding your footprint through acquisitions, targeting a smaller chain of economy-class hotels spread across the lovely Southwestern United States. It’s a fast entry into a market you’ve long wanted to explore, and this acquisition is too tempting to pass up. No other association in the business valuation or financial litigation profession provides the wealth and depth of resources like NACVA.
Why is it important to separate discontinued operations on the income statement?
Companies are required to present both basic and diluted EPS figures for income from continuing operations and for discontinued operations, separately. If the impact of a discontinued operation is deemed immaterial, it is typically incorporated into the company’s continuing operations. It is up to the discretion of the preparer to show if an operation or component of an entity, no matter how big, is material. The US Financial Accounting Standards Board (FASB) has issued a standard update aimed at improving financial reporting about discontinued operations and intended to achieve greater convergence with IFRS. However, the company you acquire also has a construction line of business, allowing them to build their own hotel properties rather than hiring an endless line of contractors and subcontractors.
Understanding Discontinued Operations: An Income Statement Deep Dive
CPA Practice Advisor has products that deliver powerful content to you in a variety of forms including online, email and social media. The top 10 firm said Aug. 19 it will acquire Stax, a Boston-based strategy consulting firm specializing in services for private equity companies, as well as their portfolio companies and advisors. After being named the top accounting firm providing services for businesses in the construction industry for five of the last six years including last year, CliftonLarsonAllen was dethroned by CBIZ in Construction Executive’s 2025 rankings. Accounting Today is a leading provider of online business news for the accounting community, offering breaking news, in-depth features, and a host of resources and services. The sale of a single factory in a network of many or the discontinuation of a minor product line would not meet this threshold. The assessment requires judgment and is based on the unique facts and circumstances of the company.
- It is important to note that subsequent increases in fair value cannot be recognized above the original carrying amount prior to the impairment.
- This Handbook provides an in-depth look at the classification of operations that have been or will be disposed of.
- It provides a 3-step process for determining when and how to report and disclose discontinued operations.
- Their audit procedures are designed to detect material misstatements, whether intentional or unintentional, that could mislead stakeholders.
- This oversight is crucial for maintaining investor confidence and preventing fraudulent financial reporting.
- A gain or loss recognized on the disposal or loss recognised on classification of held for sale should also be included in discontinued operations line in the income statement.
FASB issues update on discontinued operations reporting standard
Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. According to FASB, some stakeholders have criticized the rule for casting too wide of a net.
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Your executive team rightfully feels that the construction business is well outside of your core competencies and chooses to sell it. The sale would represent a discontinued operation in the period you sell the business because retaining it would qualify as a strategic shift in your operations. This information helps investors assess the significance of the discontinued operation and its potential impact on the company’s future performance. A component of an entity must represent a strategic shift that will have a major effect on the organization’s operations and financial results. Independent auditors play a pivotal role in ensuring the accuracy and fairness of discontinued operations reporting.
And as always, if you need a helping hand to guide the way, Embark is at the ready to lend you our expertise. That isn’t to say that discontinued operations are a migraine waiting to happen, though. Like most things in the big ol’ financial accounting world, when you understand the guidance behind them, you make your accounting team’s collective life much easier.
FASBs’ Proposed Accounting Standard Update (ASU) (Sub-topic 470-
These disclosures include a description of the discontinued operation, the date of disposal or classification as held for sale, the carrying amount of assets and liabilities, and the method of disposal. The cornerstone of accounting for discontinued operations rests on the accurate measurement of assets designated as “held for sale.” The primary objective is to reflect these assets at their fair value, less costs to sell. The hallmark of discontinued operations reporting lies in its segregation from continuing operations. This separation is paramount to avoid distorting the assessment of ongoing business performance. What this means is the new guidance provides a lighter financial-reporting burden when small divestitures occur. This is a rare “phew” finance teams rarely feel after seeing new accounting guidance.
The major classes of these assets and liabilities are either detailed on the balance sheet or disclosed in the notes, providing a clearer picture of the company’s continuing business structure. The current and prior period results of operations of the component, which meets the criteria of discontinued operations, are presented separately. Further, expenses that are expected to continue in the ongoing entity after the disposal date should be reported within continuing operations and generally, should not be allocated to discontinued operations.
Who’s Watching? Stakeholders and Discontinued Operations
The SEC has specific disclosure requirements for discontinued operations that go beyond those outlined in FASB standards. Public companies must provide detailed information about the impact of discontinued operations on their financial position, results of operations, and cash flows. Decoding the intricacies of discontinued operations transcends mere accounting mechanics; it’s about understanding its profound impact on diverse stakeholders. Both internal and external parties meticulously analyze this information, each with distinct objectives and perspectives. The insight gained from these regulatory guidelines informs critical decision-making processes, ensuring transparency and accountability in financial reporting. Further disclosures include detailing the major classes of assets and liabilities of the discontinued operation.
Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The “costs to sell” component includes direct incremental costs that are directly attributable to the disposal of the asset, such as brokerage commissions, legal fees, and advertising expenses. This oversight is crucial for maintaining investor confidence and preventing fraudulent financial reporting.