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Journal entry — Discontinued operations — FASB discusses comment letter feedback and makes tentative decisions

Published on: Nov 19, 2013

At its meeting last week, the FASB discussed outreach performed and feedback received from constituents on its proposed ASU1 on discontinued operations and made tentative decisions about various aspects of the proposal.

Scope

The FASB tentatively decided that the guidance would apply to all entities except for oil and gas properties accounted for under the full cost method.

Definition of a Discontinued Operation

The Board tentatively decided to modify the definition of a discontinued operation to specify that a component or a group of components of an entity should be reported as a discontinued operation if the following criteria, as outlined in the meeting’s Summary of Board Decisions, are met:

1.   The component or group of components has been disposed of, or is classified as held for sale, together as a group in a single transaction

2.   The disposal of the component or group of components represents a strategic shift that has (or will have) a major effect on an entity’s financial results. A strategic shift includes a disposal of:

a.   A separate major line of business,

b.   A separate major geographical area of operations, or

c.   A combination of parts of (a) or (b) that make up a major part of an entity’s operations and financial results.

Further, the Board “decided that an acquired business that is classified as held for sale on the date of acquisition also should be reported as a discontinued operation.”

The Board also tentatively decided to (1) remove language about a single coordinated plan from the definition of a discontinued operation because it was confusing and (2) add examples to clarify what may constitute a major line of business or major geographical area of operations.

In addition, the Board tentatively reaffirmed its decision to exclude the guidance on continuous involvement from the definition of a discontinued operation; however, an entity would still be required to disclose information about its continuing involvement (as discussed in the proposal) as long as the discontinued operation is included in the financial statements presented.  

Presentation

The Board tentatively decided to require entities to reclassify assets and liabilities as discontinued operations for all periods presented in their financial statements.

Disclosures

While the Board tentatively decided to keep many of the proposed ASU’s disclosure requirements, it decided to (1) modify the requirements related to equity method investments and nonpublic entities, (2) eliminate the requirements related to the balance sheet and statement of operations reconciliation for amounts by major class for individually material disposals and disclosure of financing cash flows, and (3) remain silent on how to disclose multiple disposals (material and immaterial) in the aggregate.

As indicated in the Summary of Board Decisions, the Board decided that for “an equity method investment that meets the definition of a discontinued operation, an entity should disclose summarized information about assets, liabilities, and results of operations of the investee if that information was disclosed in financial reporting periods prior to the disposal.” In addition, the final standard will include additional examples to clarify how to apply the guidance to disposals of equity method investments or wholly owned subsidiaries when an entity retains an equity method investment.

The Summary of Board Decisions also notes that entities would be required to disclose the following for all other discontinued operations:

1.   The pretax profit (loss) of the discontinued operation for the periods that the results of operations of the discontinued operation are reported in the statement of comprehensive income

2.   The major line items constituting the pretax profit (loss) of the discontinued operation for the periods that the results of operations of the discontinued operation are reported in the statement of comprehensive income

3.   The operating and investing cash flows of the discontinued operation for the periods that the results of operations of the discontinued operation are reported in the statement of comprehensive income

4.   If the discontinued operation includes a noncontrolling interest, the pretax profit (loss) attributable to the parent for the periods that the results of operations of the discontinued operation are reported in the statement of comprehensive income

5.   The carrying amount(s) of the major classes of assets and liabilities included as part of a discontinued operation for all periods that the discontinued operation is classified as held for sale in the statement of financial position. 

Further, the Board tentatively decided to add two new disclosure requirements related to the disposal of an individually material component of a public entity that does not meet the definition of a discontinued operation. Such entities would be required to disclose:

1.   The pretax profit or loss attributable to the individually material component . . . for the period in which it is sold or classified as held for sale and for all prior periods presented in the statement of comprehensive income

2.   If the component . . . includes a noncontrolling interest, the profit or loss attributable to the parent for the period in which it is sold or classified as held for sale and for all prior periods presented in the statement of comprehensive income. 

Nonpublic entities would be required to include the same information, but the requirement would be limited to the annual period when the component is classified as held for sale or sold.

Transition and Effective Date

The Board tentatively decided that entities would apply the new guidance prospectively. Public companies would apply it to annual periods beginning on or after December 15, 2014, and interim periods therein. Nonpublic entities would apply it to annual periods ending on or after December 15, 2015, and interim periods thereafter. 

Next Steps

The Board directed the staff to draft a final standard for vote by written ballot.

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1   FASB Proposed Accounting Standards Update, Reporting Discontinued Operations. The proposed ASU’s comment period ended on August 30, 2013.

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