Chapter 1 — Overview and Scope
Chapter 1 — Overview and Scope
1.1 Overview
In August 2001, the FASB issued Statement No. 144, which provided accounting and
reporting guidance on long-lived assets to be (1) held and used, (2) disposed of by sale, and (3) disposed of other than by sale. FASB Statement 144 also provided
accounting and reporting guidance on discontinued operations and broadened the
presentation to include more disposal transactions than previous guidance. The guidance in Statement 144 was subsequently codified into ASC 360-10 and ASC
205-20.
In April 2014, the FASB issued ASU
2014-08, which elevated the threshold for presenting a disposal
transaction as a discontinued operation. The FASB issued this ASU partly in response
to stakeholder feedback that “under current guidance too many disposals of assets
qualify for discontinued operations presentation, resulting in financial statements
that are less decision useful for users and higher costs for preparers.” Under the
revised guidance, an entity presents a disposal as a discontinued operation if it
“represents a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results” or is “a business or nonprofit activity that, on
acquisition, meets the criteria . . . to be classified as held for sale.” The
guidance in ASU 2014-08 replaced the previous guidance in ASC 205-20 on reporting
discontinued operations.
1.2 Overview of the Accounting and Reporting for Long-Lived Assets and Discontinued Operations
Long-lived assets within the scope of ASC 360-10 are accounted for
and tested for impairment differently depending on the entity’s intent with regard
to the assets. Long-lived assets that the entity intends to hold and use in its
operations, including long-lived assets that the entity intends to abandon,
distribute to owners, or exchange in a nonmonetary transaction that is accounted for
at carrying amount, are tested for impairment when a triggering event occurs by
using a two-step recoverability test. By contrast, long-lived assets that the entity
intends to sell are tested for impairment upon classification as held for sale and
in each subsequent reporting period by comparing their carrying amount with their
fair value less costs to sell.
The following flowchart summarizes
how long-lived assets are accounted for and presented on the basis of the entity’s
intent regarding the assets (also included are references to where additional
information can be found):
1.2.1 Long-Lived Assets Classified as Held and Used
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.”
In accordance with ASC 360-10-35-17, a long-lived asset (asset
group) is not recoverable if its carrying amount “exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset (asset group).” When a long-lived asset (asset group) is not
recoverable, it is necessary to determine its fair value since “[a]n impairment
loss shall be measured as the amount by which the carrying amount of a
long-lived asset (asset group) exceeds its fair value.”
See Chapter 2 for more
information about the accounting for and presentation of long-lived assets
classified as held and used.
1.2.2 Long-Lived Assets to Be Disposed of by Sale
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.
See Chapter 3 for more information about
the accounting for and presentation of long-lived assets to be disposed of by
sale.
1.2.3 Long-Lived Assets to Be Disposed of Other Than by 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.
See Chapter 4 for more information about
the accounting for and presentation of long-lived assets to be disposed of other
than by sale.
1.2.4 Discontinued Operations
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.
See Chapter
5 for more information about assessing whether a disposal
qualifies for discontinued-operations reporting.
1.2.5 Presentation and Disclosure Requirements for Disposals That Are Not Discontinued Operations
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.
See Chapter 6 for more information about the presentation
and disclosure requirements for disposals that do not qualify as discontinued
operations.
1.2.6 Presentation and Disclosure Requirements for Disposals That Are Discontinued Operations
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.”
See Chapter 7 for more information about
the presentation and disclosure requirements for disposals that qualify as
discontinued operations.
1.2.7 Reporting Considerations for SEC Registrants
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).
See Chapter 8 for more information about the reporting
considerations for SEC registrants.
1.3 Scope of ASC 360-10 — Impairment or Disposal of Long-Lived Assets
ASC 360-10
05-4 The
Impairment or Disposal of Long-Lived Assets Subsections
provide guidance for:
- Recognition and measurement of the impairment of long-lived assets to be held and used
- Measurement of long-lived assets to be disposed of by sale
- Disclosures about the impairment or disposal of long-lived assets and disposals of individually significant components of an entity.
05-5 For
long-lived assets disposed of or classified as held for
sale, different presentation and disclosures are required
depending on the nature of the disposal. If the long-lived
assets are a significant component of an entity, more
extensive disclosures are required. Additionally, if the
component of an entity meets the definition of discontinued
operation in paragraph 205-20-45-1B, an entity shall refer
to Subtopic 205-20 for the presentation and disclosure
requirements for discontinued operations (see the flowchart
in paragraph 360-10-55-18A for an illustration).
15-4 The guidance in the Impairment
or Disposal of Long-Lived Assets Subsections applies to the
following transactions and activities:
- Except as indicated in (b) and the
following paragraph, all of the transactions and
activities related to recognized long-lived assets
of an entity to be held and used or to be disposed
of, including:
- Right-of-use assets of lessees
- Long-lived assets of lessors subject to operating leases
- Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting
- Long-term prepaid assets.
- The following transactions and
activities related to assets and liabilities that
are considered part of an asset group or a disposal
group:
- If a long-lived asset (or assets) is part of a group that includes other assets and liabilities not covered by the Impairment or Disposal of Long-Lived Assets Subsections, the guidance in the Impairment or Disposal of Long-Lived Assets Subsections applies to the group. In those situations, the unit of accounting for the long-lived asset is its group. For a long-lived asset or assets to be held and used, that group is referred to as an asset group. For a long-lived asset or assets to be disposed of by sale or otherwise, that group is referred to as a disposal group. Examples of liabilities included in a disposal group are legal obligations that transfer with a long-lived asset, such as certain environmental obligations, and obligations that, for business reasons, a potential buyer would prefer to settle when assumed as part of a group, such as warranty obligations that relate to an acquired customer base.
- The guidance in the Impairment or Disposal of Long-Lived Assets Subsections does not change generally accepted accounting principles (GAAP) applicable to those other individual assets (such as accounts receivable and inventory) and liabilities (such as accounts payable, long-term debt, and asset retirement obligations) not covered by the Impairment or Disposal of Long-Lived Assets Subsections that are included in such groups.
15-5
The guidance in the Impairment or Disposal of Long-Lived
Assets Subsections does not apply to the following
transactions and activities:
- Goodwill
- Intangible assets not being amortized that are to be held and used
- Servicing assets
- Financial instruments, including investments in equity securities accounted for under the cost or equity method
- Deferred policy acquisition costs
- Deferred tax assets
- Unproved oil and gas properties that are being accounted for using the successful-efforts method of accounting
- Oil and gas properties that are accounted for using the full-cost method of accounting as prescribed by the Securities and Exchange Commission (SEC) (see Regulation S-X, Rule 4-10, Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and Conservation Act of 1975)
- Certain other long-lived assets for which the
accounting is prescribed elsewhere in the
standards:
- For guidance on financial reporting in the record and music industry, see Topic 928.
- For guidance on financial reporting in the broadcasting industry, see Topic 920.
- For guidance on accounting for the costs of computer software to be sold, leased, or otherwise marketed, see Subtopic 985-20.
- For guidance on accounting for abandonments and disallowances of plant costs for regulated entities, see Subtopic 980-360.
15-6 Entities
that hold collections shall follow the accounting and
disclosure requirements in Subtopic 958-360 on
not-for-profit entities — property, plant, and
equipment.
ASC 360-10 addresses the impairment or disposal of long-lived assets
and applies to all entities. ASC 360-10 applies to individual long-lived assets as
well as groups of assets (and possibly liabilities) that include one or more
long-lived assets. Once an entity adopts ASC 842, the impairment guidance in ASC
360-10 also applies to a lessee’s right-of-use (ROU) assets for both operating and
finance leases (see Section
2.3.4).
ASC 360-10-15-5 lists a number of assets (e.g., servicing assets,
deferred policy acquisition costs, costs of computer software to be sold) that are
outside the scope of the guidance in the subsections on impairment or disposal of
long-lived assets. The impairment of those assets is addressed by other GAAP. These
scope exclusions apply only to the assets for which the accounting is prescribed by
other GAAP, not to the entire entity with those assets. As a result, an entity may
account for some assets in accordance with other GAAP and others in accordance with
ASC 360-10. In addition, entities within the scope of ASC 970 should consider the
guidance in ASC 970-360 and ASC 970-340.
ASC 360-10-05-5 clarifies that ASC 360-10 applies to the accounting
for disposals of long-lived assets. If the disposal meets the definition of a
discontinued operation, an entity must apply the presentation and disclosure
requirements in ASC 205-20; if the disposal does not meet the definition of a
discontinued operation, an entity must apply the presentation and disclosure
requirements in ASC 360-10. The disclosure requirements an entity needs to apply
under ASC 360-10 differ depending on the significance of the disposal.
1.4 Scope of ASC 205-20 — Presenting Discontinued Operations
ASC 205-20
05-1 This
Subtopic provides guidance on the presentation and
disclosure requirements for discontinued operations. A
discontinued operation may include a component of an entity
or a group of components of an entity, or a business or
nonprofit activity.
15-1 This
Subtopic follows the same Scope and Scope Exceptions as
outlined in the Overall Subtopic; see Section 205-10-15,
with specific transaction qualifications noted below.
15-2 The
guidance in this Subtopic applies to either of the
following:
- A component of an entity or a group of components of an entity that is disposed of or is classified as held for sale
- A business or nonprofit activity that, on acquisition, is classified as held for sale.
Pending Content (Transition
Guidance: ASC 805-60-65-1)
15-2 The guidance in this Subtopic
applies to either of the following:
-
A component of an entity or a group of components of an entity that is disposed of or is classified as held for sale
-
A business or nonprofit activity that, on acquisition or upon formation of a joint venture, is classified as held for sale.
15-3 The
guidance in this Subtopic does not apply to oil and gas
properties that are accounted for using the full-cost method
of accounting as prescribed by the U.S. Securities and
Exchange Commission (SEC) (see Regulation S-X, Rule 4-10,
Financial Accounting and Reporting for Oil and Gas Producing
Activities Pursuant to the Federal Securities Laws and the
Energy Policy and Conservation Act of 1975).
ASC 205-10
05-3 The Discontinued Operations
Subtopic discusses the conditions under which either of the
following would be reported in an entity’s financial
statements as a discontinued operation:
- A component of an entity that either has been disposed of or is classified as held for sale
- A business or nonprofit activity that, on acquisition, is classified as held for sale.
Pending Content (Transition
Guidance: ASC 805-60-65-1)
05-3
The Discontinued Operations Subtopic discusses the
conditions under which either of the following
would be reported in an entity’s financial
statements as a discontinued operation:
-
A component of an entity that either has been disposed of or is classified as held for sale
-
A business or nonprofit activity that, on acquisition or upon formation of a joint venture, is classified as held for sale.
05-3A If a
component of an entity that either has been disposed of or
is classified as held for sale does not meet the conditions
to be reported in discontinued operations, Section 360-10-45
on other presentation matters of property, plant, and
equipment provides guidance on presenting disposal gains and
losses and impairment losses on assets classified as held
for sale.
15-2 The
guidance in the Presentation of Financial Statements Topic
applies to business entities and not-for-profit entities
(NFPs).
ASC 205-20 applies to all businesses and not-for-profit entities
(NFPs). ASC 205-20 applies to a component, or group of components, of an entity or a
newly acquired business or nonprofit activity that meets the held-for-sale criteria
upon acquisition. A component of an entity “comprises operations and cash flows that
can be clearly distinguished . . . from the rest of the entity.” Unlike a disposal
group, a component of an entity does not need to include long-lived assets. For
example, an equity method investment is a financial instrument and is not within the
scope of ASC 360-10 but could qualify for discontinued-operations reporting under
ASC 205-20. If so, an entity would apply the held-for-sale criteria and
discontinued-operations reporting guidance in ASC 205-50 for the disposal of an
equity method investment.
ASC 205-20 includes a scope exception for oil and gas properties
that use the full-cost method of accounting. Paragraphs BC27 and BC28 of ASU 2014-08
explain the FASB’s reasoning behind retaining this exception:
Under the full cost method of accounting, all costs associated with property
acquisition, exploration, and development activities are capitalized to cost
centers, which are established on a country-by-country basis. The definition
of discontinued operation, however, applies to disposals of components of an
entity, which is defined as the lowest level for which identifiable cash
flows are largely independent of the cash flows of other assets and
liabilities.
The Board concluded that the definition of discontinued
operation will not be operable under the full cost method of accounting
because of differences in the tracking and allocation of costs, which is at
a much higher level than the method in Topic 360 and in the definition of
discontinued operation.
Changing Lanes
In August 2023, the FASB issued ASU 2023-05, which requires entities
that qualify as either a joint venture
or a corporate joint venture, as defined in the ASC
master glossary, to apply a new basis of accounting upon the formation of
the joint venture. The ASU’s amendments “are effective prospectively for all
joint venture formations with a formation date on or after January 1, 2025.”
Early adoption is permitted.
The ASU amends ASC 205-10-05-3(b), and makes related amendments to ASC
205-20, to indicate that a “business or nonprofit activity that, on
acquisition or upon formation of a joint venture, is classified as held for
sale” by the newly formed joint venture would be reported as a discontinued
operation.