Fasb Offers New Guidance For Reporting On Discontinued Operations 5

Discontinued operations Identification presentation and disclosure

The criteria for a component to be classified as discontinued are strict, reflecting the significance of this classification for investors and other stakeholders. It should be noted that only a component or group of components must meet both the disposal and business separation criteria. GAAP closer to IFRS because part of the new definition of discontinued operations is based on elements of the definition in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations. “Smith & Howard” is the brand name under which Smith & Howard PC and Smith & Howard Advisory LLC provide professional services.

Handbook: Discontinued operations & HFS disposal groups

Financial statements present a historical view of an entity’s financial position, operations and cash flows. Many financial statement users are interested in using the statements as a basis to predict the future. A lender is interested in historical cash flows for purposes of predicting future cash flows and a borrower’s ability to repay a loan. A potential investor uses the historical information to evaluate a potential investee’s ability to provide a sufficient return on investment. A current shareholder uses the historical information to make decisions about whether to sell or hold its investment. Only disposals representing a strategic shift in operations that have a major effect on the organization’s operations and financial results will be required to be presented as discontinued operations.

The company also may sell different segments of its business, or it may shift its business model. In this case, the company must report discontinued operations separately from ongoing operations. In the United States, companies typically use GAAP to determine whether to report discontinued operations. This ensures transparency and comparability across different companies and reporting periods. Key areas of focus include the separate presentation of discontinued operations in the income statement and the appropriate disclosure of related information in the notes to the financial statements. The assets and liabilities of the component classified as held for sale must be presented separately from the company’s other assets and liabilities.

If a loss occurs during the disposal of a discontinued operation, that loss, net of tax, is reported as part of the discontinued operations section on the income statement with discontinued operations. This includes losses from the operation’s activities and any loss incurred from selling the assets at below their book value. For publicly traded companies, compliance with Securities and Exchange Commission (SEC) filing requirements is paramount. The SEC mandates specific disclosures related to discontinued operations to ensure that investors have access to all material information necessary to make informed investment decisions.

Discontinued operations: Identification, presentation and disclosure

The disclosure of the pretax income attributable to such a disposal is intended to provide users with information about the ongoing trends in a company’s results from continuing operations. In conclusion, the accounting for discontinued operations demands a meticulous approach, focusing on accurate measurement, diligent impairment assessment, and unwavering compliance with financial reporting standards and SEC requirements. This ensures that stakeholders receive a transparent and reliable view of the company’s financial performance and strategic direction.

Why is it important to separate discontinued operations on the income statement?

• The FASB affirmed in a statement the proposed guidance could also achieve greater convergence with IFRS 5.
• Examples include the disposal of a major line of business or the exit from a major geographical area, like a retailer closing all its stores in Europe.
• This avoids unnecessary complexity in the financial statements and focuses attention on the most relevant information.
• Public companies must provide detailed information about the impact of discontinued operations on their financial position, results of operations, and cash flows.
• The insights derived from discontinued operations disclosures significantly influence decision-making processes, from internal strategic adjustments to external investment allocations.

To provide a comprehensive understanding, discontinued operations must be presented retrospectively in comparative financial statements. The disposal must also represent a “strategic shift” that has, or will have, a major effect on the company’s operations and financial results. Examples include the disposal of a major line of business or the exit from a major geographical area, like a retailer closing all its stores in Europe. For instance, a company may have a positive overall EPS, but closer inspection may reveal that the continuing operations are generating losses.

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• Closing or selling off such a division lets the company mitigate losses or accumulate additional capital that can be invested in its core businesses.
• Those strategic shifts should have a major effect on the organization’s operations and financial results.
• Further disclosures include detailing the major classes of assets and liabilities of the discontinued operation.
• Investors and investment managers scrutinize discontinued operations disclosures as a critical input for evaluating a company’s investment merit.
• This collaborative approach reflects a global push towards greater transparency and consistency in financial reporting.

Also, when calculating your total net income, combine the gain or loss from the discontinued operation with that from your ongoing operations. Sure, you might have to make a few adjustments here and there due to contingent liabilities or contract terms, benefit plan obligations, or other items, but you get the idea. Well, maybe that can of ravioli in your pantry will, but let’s call that an outlier. Everything else, including once vital components of your operations, has a finite lifespan. Unfortunately, when you have discontinued operations, Fasb Offers New Guidance For Reporting On Discontinued Operations it’s not as easy as letting it fade into the ether. In fact, the fine folks at FASB outright say your discontinued operations can’t go gentle into that good accounting night.

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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.

Investors and investment managers scrutinize discontinued operations disclosures as a critical input for evaluating a company’s investment merit. This information provides vital clues about a company’s strategic direction, risk profile, and future earnings potential. This dual presentation allows stakeholders to isolate the impact of the discontinued operations on EPS and to more accurately assess the profitability and future prospects of the company’s ongoing business. The changes address concerns that too many disposals of assets—including small groups of assets that are recurring in nature—qualify for discontinued operations presentation, FASB Chairman Russell Golden said in a statement. New guidance issued Thursday by FASB will reduce the number of disposals of assets that should be presented as discontinued operations in organizations’ financial reporting. FASB chairman Leslie Seidman said investors are concerned that « too many » disposals of assets qualify for discontinued operations presentation, which makes current rules more « costly and difficult to apply ».

Measurement and Disclosure Requirements

Then, a separate section shows the profit or loss from discontinued operations, net of tax. This helps investors understand the impact of the discontinued segment on the overall business. Expanded disclosures are required in the new guidance to provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. 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. The gain or loss should be presented separately on the face of the income statement or disclosed in the notes to the financial statements.

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Companies are 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.