1.2 Overview of the Accounting and Reporting for Long-Lived Assets and Discontinued Operations

Under ASC 360-10-35-21, long-lived assets that are classified as held and used “shall be tested for recoverability whenever events or changes in circumstances indicate that [their] carrying amount may not be recoverable.” In addition, ASC 360-10-35-23 indicates that such assets “shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.”

All the criteria in ASC 360-10-45-9 must be met for a long-lived asset (disposal group) to be classified as held for sale. Once these criteria are met, the long-lived asset (disposal group) is measured at the lower of its carrying amount or fair value less cost to sell. The entity recognizes a loss, if any, to adjust the carrying amount of the long-lived asset (disposal group) to its fair value less cost to sell in the period in which the held-for-sale criteria are met and in each subsequent period until the long-lived asset (disposal group) is sold. Therefore, the carrying amount of the long-lived asset (disposal group) is adjusted for subsequent increases or decreases in its fair value less cost to sell, except that any subsequent increase cannot exceed the cumulative loss previously recognized. Any gain or loss from the sale of a long-lived asset (disposal group) not previously recognized is recognized on the date of sale. In addition, long-lived assets are not depreciated or amortized while they are classified as held for sale.

An entity may dispose of one or more long-lived assets before the end of their previously estimated useful life by, for example, abandoning them, exchanging them in a transaction accounted for at carrying amount, or distributing them to owners in a spin-off. Assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of. Upon disposal, an entity must assess whether the disposed-of assets qualify for discontinued-operations reporting. If so, the entity should apply the presentation and disclosure requirements in ASC 205-20. If not, the entity should apply the presentation and disclosure requirements in ASC 360-10.

The purpose of reporting discontinued operations separately from continuing operations is to provide stakeholders with information on assessing the effects of a disposal on an entity’s ongoing operations. The operations of a disposal group may only be presented as a discontinued operation once the assets (and liabilities) meet the criteria to be classified as held for sale, have been sold, or have been otherwise disposed of (e.g., abandonment) and only if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. Therefore, not all disposal transactions qualify for discontinued-operations reporting.

ASC 360-10-45-14 states, in part, that a “long-lived asset classified as held for sale (but not qualifying for presentation as a discontinued operation in the statement of financial position in accordance with paragraph 205-20-45-10) shall be presented separately in the statement of financial position of the current period).” The presentation and disclosure requirements for a long-lived asset (disposal group) that is classified as held for sale, or that has been disposed of but does not qualify for discontinued-operations reporting, differ depending on whether the disposal is an individually significant component of an entity. An entity will need to use judgment in interpreting the term “individually significant” since it is not defined.

If the criteria for discontinued-operations reporting are met, the results of operations of the component that is classified as held for sale or that has been sold or otherwise disposed of, including any gain or loss recognized, should be reported as discontinued operations in the statement of operations, retrospectively, for all periods presented. In addition, ASC 205-20-45-10 states, in part, that “[i]n the period(s) that a discontinued operation is classified as held for sale and for all prior periods presented, the assets and liabilities of the discontinued operation shall be presented separately in the asset and liability sections, respectively, of the statement of financial position.”

In the period in which a component meets the criteria to be presented as a discontinued operation, a registrant must present the component as a discontinued operation for all periods presented. Accordingly, SEC registrants must consider the impact of the retrospective change on the historical financial statements included in their Exchange Act reports (e.g., Forms 10-K and 10-Q) and in registration statements under the Securities Act (e.g., registration statements on Form S-3) and other nonpublic offerings. Registrants may also be required to report a disposition, including certain disposals that do not qualify as discontinued operations, on a Form 8-K and provide pro forma financial information that gives effect to the disposition. Further, registrants must consider the impact the revised financial statements may have on other SEC requirements (e.g., SEC Regulation S-X, Rules 3-05, 3-09, 4-08(g), and 3-10).