Marketplace changes during the COVID-19 crisis have caused many companies to make major strategic shifts in their operations — and some changes are expected to be permanent. In certain cases, these pivot strategies may need to be reported under the complex discontinued operations rules under U.S. Generally Accepted Accounting Principles. Show
What Are Discontinued Operations? The scope of what’s reported as discontinued operations was narrowed by Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Since the updated guidance went into effect in 2015, the disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results. A component comprises operations and cash flows that can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the company. It could be a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group. Examples of a qualifying strategic shift include disposal of a major geographic area, a line of business or an equity method investment. When such a strategic shift occurs, a company must present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the balance sheet. On the income statement, the results of discontinued operations are reported separately (net of income tax) from continuing operations in both the current and comparative periods. Allocating costs between discontinued and continuing operations is often challenging because only direct costs may be associated with a discontinued operation. What Disclosures Are Required? Under GAAP, companies also must provide detailed disclosures when reporting discontinued operations. The goal is to show the financial effect of such a shift to the users of the entity’s financial statements — allowing them to better understand continuing operations. The following disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:
Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation or if a disposal doesn’t qualify for discontinued operations reporting. Unfamiliar Territory Today’s conditions — including shifts to work-from-home arrangements, domestic supply chains and online distribution methods — have disrupted traditional business models in many sectors of the economy. These kinds of strategic changes don’t happen often, and in-house personnel may be unfamiliar with the latest guidance when preparing your company’s year-end financial statements. Contact us to help ensure you’re in compliance. The objective of IAS 35 is to establish principles for reporting information about discontinuing activities (as defined), thereby enhancing the ability of users of financial statements to make projections of an enterprise's cash flows, earnings-generating capacity and financial position, by segregating information about discontinuing activities from information about continuing operations. The Standard does not establish any recognition or measurement principles in relation to discontinuing operations – these are dealt with under other IAS. In particular, IAS 35 provides guidance on how to apply IAS 36 Impairment of Assets and IAS 37 Provisions, Contingent Liabilities and Contingent Assets to a discontinuing operation. [IAS 35.17-19] Discontinuing operation definedDiscontinuing operation: A relatively large component of a business enterprise – such as a business or geographical segment under IAS 14 Segment Reporting – that the enterprise, pursuant to a single plan, either is disposing of substantially in its entirety or is terminating through abandonment or piecemeal sale. [IAS 35.2] A restructuring, transaction or event that does not meet the definition of a discontinuing operation should not be called a discontinuing operation. [IAS 35.43] When to discloseDisclosures begin after the earlier of the following:
The disclosures are required if a plan for disposal is both approved and publicly announced after the end of the financial reporting period but before the financial statements for that period are approved. A board decision after year-end, by itself, is not enough. [IAS 35.29] What to discloseThe following must be disclosed: [IAS 35.27 and IAS 35.31]
How to discloseThe disclosures may be, but need not be, shown on the face of the financial statements. Only the gain or loss on actual disposal of assets and settlement of liabilities must be on the face of the income statement. [IAS 35.39] IAS 35 does not prescribe a particular format for the disclosures. Among the acceptable ways:
In periods after the discontinuance is first approved and announced, and before it is completed, the financial statements must update the prior disclosures, including a description of any significant changes in the amount or timing of cash flows relating to the assets and liabilities to be disposed of or settled and the causes of those changes. [IAS 35.33] The disclosures continue until completion of the disposal, though there may be cash payments still to come. [IAS 35.35-36] Comparative information presented in financial statements prepared after initial disclosure must be restated to segregate the continuing and discontinuing assets, liabilities, income, expenses, and cash flows. This helps in trend analysis and forecasting. [IAS 35.45] IAS 35 applies to only to those corporate restructurings that meet the definition of a discontinuing operation. But many so-called restructurings are of a smaller scope than an IAS 35 discontinuing operation, such as plant closings, product discontinuances, and sales of subsidiaries while the company remains in the same line of business. IAS 37 on provisions specifies the accounting and disclosures for restructurings. The specified disclosures are required to be presented separately for each discontinuing operation. [IAS 35.38] Income and expenses relating to discontinuing operations should not be presented as extraordinary items. [IAS 35.41] Notes to an interim financial report should disclose information about discontinuing operations. [IAS 35.47] Where is income from discontinued operations reported?Key Takeaways. Discontinued operations is an accounting term for parts of a firm's operations that have been divested or shut down. They are reported on the income statement as a separate entry from continuing operations.
What is a gain on discontinued operations?The gain or loss on a disposed component is calculated as the consideration received from the disposal of the component less its carrying value, costs incurred to sell the component, and any loss recognized upon and during its classification as held for sale. See PPE 6.4.
Where are gains reported on the income statement?Extraordinary items, gains and losses, accounting changes, and discontinued operations are always shown separately at the bottom of the income statement ahead of net income, regardless of which format is used.
Where is a gain from the sale of discontinued operations reported in the financial statements quizlet?how are discontinued operations reported in the income statement? The net-of-tax income effects of a discontinued operation must be disclosed separately in the income statement, below income from continuing operations. The income effects include income (loss) from operations and gain (loss) on disposal.
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