Chapter 4 — Criteria for Reporting a Discontinued Operation
Chapter 4 — Long-Lived Assets to Be Disposed of Other Than by Sale
4.1 Overview
ASC 360-10
45-15 A long-lived asset to be
disposed of other than by sale (for example, by abandonment,
in an exchange measured based on the recorded amount of the
nonmonetary asset relinquished, or in a distribution to
owners in a spinoff) shall continue to be classified as held
and used until it is disposed of. The guidance on long-lived
assets to be held and used in Sections 360-10-35, 360-10-45,
and 360-10-50 shall apply while the asset is classified as
held and used. If a long-lived asset is to be abandoned or
distributed to owners in a spinoff together with other
assets (and liabilities) as a group and that disposal group
meets the conditions in paragraphs 205-20-45-1A through
45-1C to be reported in discontinued operations, paragraphs
205-20-45-3 through 45-5 shall apply to the disposal group
at the date it is disposed of.
A long-lived asset (or a group of assets) may be disposed of in ways
other than by sale, such as by abandonment, in an exchange measured on the basis of
the recorded amount of the nonmonetary asset relinquished (i.e., a nonmonetary
exchange), or in a distribution 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, entities must assess whether the disposed-of assets
qualify for discontinued-operations reporting. If not, the entity should apply the
presentation and disclosure requirements in ASC 360-10 (see Chapter 6). If so, the entity
should apply the presentation and disclosure requirements in ASC 205-20 (see
Chapter 7).
Because assets to be disposed of other than by sale are classified
as held and used until they are disposed of, the operations and any incremental
direct costs (e.g., advisory fees or legal fees) that are incurred in connection
with the disposal cannot be reported in discontinued operations until the disposal
group is abandoned or otherwise disposed of even if the disposal would otherwise
qualify for discontinued-operations reporting.
4.2 Assets to Be Abandoned
ASC 360-10
Long-Lived Assets to
Be Abandoned
35-47 For purposes of this
Subtopic, a long-lived asset to be abandoned is disposed of
when it ceases to be used. If an entity commits to a plan to
abandon a long-lived asset before the end of its previously
estimated useful life, depreciation estimates shall be
revised in accordance with paragraphs 250-10-45-17 through
45-20 and 250-10-50-4 to reflect the use of the asset over
its shortened useful life (see paragraph 360-10-35-22).
35-48 Because the continued use of
a long-lived asset demonstrates the presence of service
potential, only in unusual situations would the fair value
of a long-lived asset to be abandoned be zero while it is
being used. When a long-lived asset ceases to be used, the
carrying amount of the asset should equal its salvage value,
if any. The salvage value of the asset shall not be reduced
to an amount less than zero.
Long-Lived Asset
Temporarily Idled
35-49 A long-lived asset that has
been temporarily idled shall not be accounted for as if
abandoned.
Under ASC 360-10-35-47, “a long-lived asset to be abandoned is
disposed of when it ceases to be used.” Therefore, an asset group may not be
classified as held for sale or reported in discontinued operations until it is
abandoned. Further, EITF Topic D-104 clarified that when “a component of an entity
will be abandoned through the liquidation or run-off of operations, that component
should not be reported as a discontinued operation in accordance with [ASC 205-20]
until all operations, including run-off operations, cease.” (While the guidance in
Topic D-104 was not codified, we believe that it continues to be relevant.) For
example, manufacturing equipment an entity expects to cease using after fulfilling a
backlog of orders is not considered abandoned while the entity is still using it. In
addition, ASC 360-10-35-49 points out that a “long-lived asset that has been
temporarily idled [is not] accounted for as if abandoned.”
Example 4-1
Classifying a Component
to Be Abandoned
On December 15, 20X6, Company M, a
calendar-year company, announced a plan to abandon the
operations of its Argentinean subsidiary, Company E. Company
M has determined that E represents a component of the entity
and that its abandonment will represent a strategic shift
that has (or will have) a major effect on M’s operations and
financial results. According to the plan of abandonment, E
would cease accepting new business as of December 31, 20X6.
Company M expects that E will be able to complete production
of all remaining orders by March 15, 20X7.
Because M’s plan is to abandon E (rather
than sell E), E’s assets and liabilities will remain
classified as held and used and E’s operations cannot be
presented in discontinued operations until abandonment
occurs. Because E will be fulfilling remaining orders until
March 15, 20X7, M would not classify E’s operations in
discontinued operations in its December 31, 20X6, financial
statements. However, as of December 15, 20X6, M may need to
revise its depreciation estimates in accordance with ASC
360-10-35-47 to reflect the use of E’s assets over their
shortened useful life. Company M may also need to test E’s
assets for recoverability because the plan to abandon E
indicates an expectation that, more likely than not, E’s
assets will be otherwise disposed of significantly before
the end of their previously estimated useful life (i.e., one
of the impairment indicators in ASC 360-10-35-21).
An entity that intends to abandon an asset group before the end of its previously
estimated useful life should revise its depreciation or amortization estimates in
accordance with the guidance on changes in estimate in ASC 250-20. The purpose of
such a revision is to reflect the use of the asset group over its shortened useful
life and a salvage value consistent with the decision to abandon. A decision to
abandon an asset is also an indicator of impairment; accordingly, in such
circumstances, an entity would be required to perform a recoverability test by using
cash flows related to its useful life that has now been shortened. In some cases,
the asset may still be recoverable and would not be impaired. Even if that is the
case, the entity would still need to consider revising future depreciation over the
shortened useful life.
Further, ASC 360-10-35-48 states:
Because the continued use of a long-lived asset demonstrates the presence of
service potential, only in unusual situations would the fair value of a
long-lived asset to be abandoned be zero while it is being used. When a
long-lived asset ceases to be used, the carrying amount of the asset should
equal its salvage value, if any. The salvage value of the asset shall not be
reduced to an amount less than zero.
However, there may be unusual circumstances in which an asset’s fair value
approximates zero (e.g., when the asset generates negative cash flows in operations
and cannot be disposed of for a positive salvage value). An entity that adjusts the
carrying value of an asset to zero should consider maintaining contemporaneous
documentation to support its conclusion.
In some cases, it may be difficult to determine whether an asset (or a group of
assets) is being disposed of by sale or by abandonment; an entity therefore may need
to use judgment in such situations. However, we believe that an entity’s intention
to sell an asset (or a group of assets) for scrap value indicates that the assets
are most likely being abandoned rather than sold.
For considerations related to cumulative translation adjustments in a foreign entity
that will be abandoned, see Section 5.5.2 of
Deloitte’s Roadmap Foreign Currency
Matters. For further details on a lessee’s abandonment of an ROU
asset, see Section 8.4.4.1 of Deloitte’s
Roadmap Leases.
4.3 Nonmonetary Exchange
A nonmonetary exchange is a reciprocal transaction that involves an
exchange of assets (or liabilities) or services with another entity. ASC
360-10-45-15 requires that a long-lived asset or asset group to be disposed of in an
exchange, measured on the basis of the recorded amount of the nonmonetary asset
relinquished, continue to be classified as held and used until it is disposed of. A
nonmonetary exchange that meets any of the below criteria in ASC 845-10-30-3 must be
recognized on the basis of the recorded amount of the nonmonetary asset given
up.
ASC 845-10
30-3 A
nonmonetary exchange shall be measured based on the recorded
amount (after reduction, if appropriate, for an indicated
impairment of value as discussed in paragraph 360-10-40-4)
of the nonmonetary asset(s) relinquished, and not on the
fair values of the exchanged assets, if any of the following
conditions apply:
- The fair value of neither the asset(s) received nor the asset(s) relinquished is determinable within reasonable limits.
- The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
- The transaction lacks commercial substance (see [ASC 845-10-30-4]).
By contrast, if the nonmonetary exchange does not meet any of the
conditions in ASC 845-10-30-3, the exchange is accounted for at fair value. In that
case, we believe that the disposal should be assessed as a sale transaction and the
disposal group should be classified as held for sale when the criteria are met (see
Section 3.3).
A decision to engage in a nonmonetary exchange does not, in and of itself, indicate
that the asset being exchanged is not recoverable. However, an entity should
consider its specific facts and circumstances in determining whether the exchange
represents an indicator of impairment. If so, the asset or assets should be tested
for impairment on a held-and-used basis if they are classified as held and used or
on a held-for-sale basis if the exchange is at fair value and the held-for-sale
classification criteria are met.
4.4 Spin-Offs and Other Nonmonetary Exchanges Recorded at Carrying Amount
ASC 360-10
Long-Lived Assets to Be
Exchanged or to Be Distributed to Owners in a
Spinoff
40-4 For purposes of this Subtopic,
a long-lived asset to be disposed of in an exchange measured
based on the recorded amount of the nonmonetary asset
relinquished or to be distributed to owners in a spinoff is
disposed of when it is exchanged or distributed. If the
asset (asset group) is tested for recoverability while it is
classified as held and used, the estimates of future cash
flows used in that test shall be based on the use of the
asset for its remaining useful life, assuming that the
disposal transaction will not occur. In such a case, an
undiscounted cash flows recoverability test shall apply
prior to the disposal date. In addition to any impairment
losses required to be recognized while the asset is
classified as held and used, an impairment loss, if any,
shall be recognized when the asset is disposed of if the
carrying amount of the asset (disposal group) exceeds its
fair value. The provisions of this Section apply to
nonmonetary exchanges that are not recorded at fair value
under the provisions of Topic 845.
The glossary in ASC 845-10-20 defines a nonreciprocal transfer as “a
transfer of assets or services in one direction, either from an entity to its owners
(whether or not in exchange for their ownership interests) or to another entity, or
from owners or another entity to the entity. An entity’s reacquisition of its
outstanding stock is an example of a nonreciprocal transfer.” By contrast, a
reciprocal exchange involves an exchange of assets (or liabilities) or services with
another entity. One example of a nonreciprocal transfer is a spin-off.
The ASC master glossary defines a spin-off as “[t]he transfer of
assets that constitute a business by an entity (the spinnor) into a new legal
spun-off entity (the spinnee), followed by a distribution of the shares of the
spinnee to its shareholders, without the surrender by the shareholders of any stock
of the spinnor.”
ASC 845-10
Nonreciprocal Transfers With Owners
30-10 Accounting for the
distribution of nonmonetary assets to owners of an entity in
a spinoff or other form of reorganization or liquidation or
in a plan that is in substance the rescission of a prior
business combination shall be based on the recorded amount
(after reduction, if appropriate, for an indicated
impairment of value) (see paragraph 360-10-40-4) of the
nonmonetary assets distributed. Subtopic 505-60 provides
additional guidance on the distribution of nonmonetary
assets that constitute a business to owners of an entity in
transactions commonly referred to as spinoffs. A pro rata
distribution to owners of an entity of shares of a
subsidiary or other investee entity that has been or is
being consolidated or that has been or is being accounted
for under the equity method is to be considered to be
equivalent to a spinoff. Other nonreciprocal transfers of
nonmonetary assets to owners shall be accounted for at fair
value if the fair value of the nonmonetary asset distributed
is objectively measurable and would be clearly realizable to
the distributing entity in an outright sale at or near the
time of the distribution.
According to ASC 845-10-30-10 above, if a company spins off a business to its
shareholders, the assets transferred are recorded at their carrying amount (after
any necessary impairment adjustments). However, if the assets transferred do not
constitute a business, the transaction is not considered a spin-off, even if the
distribution is pro rata. Instead, it is considered a dividend-in-kind, which is
generally recorded at the fair value of the assets transferred.
The assets being distributed to owners in a spin-off (i.e., the
spinnee) must remain classified as held and used until the spin-off occurs. However,
because a plan to dispose of assets before the end of their previously estimated
useful life may be an indicator of impairment, an entity would be expected to
consider whether the long-lived assets of the spinnee are impaired on a
held-and-used basis. Because a spin-off is a nonreciprocal transfer (i.e., no
consideration is received in exchange), ASC 360-10-40-4 provides specific guidance
on testing the recoverability of the spinnee and explains that “the estimates of
future cash flows used in that test shall be based on the use of the asset for its
remaining useful life, assuming that the disposal transaction will not occur.”
Connecting the Dots
ASC 505-60-25-8 addresses whether a spin-off should be
accounted for in accordance with its legal form (a “forward spin”) or as a
“reverse spin” when the substance of the transactions differs from its legal
form. There is a rebuttable presumption that a spin-off should be accounted
for on the basis of its legal form (i.e., the legal spinnor is also the
accounting spinnor). However, ASC 505-60-25-8 provides several indicators
for an entity to consider when deciding whether the presumption to account
for the transaction on the basis of its legal form should be overcome. No
one factor should be considered determinative, so when the indicators are
mixed, the entity will need to use judgment to determine which entity is the
accounting spinnee. See Section 1.2.3
of Deloitte’s Roadmap Carve-Out Financial
Statements for more information.
ASC 360-10-40-4 requires that an impairment loss be recognized if
the carrying amount of the spinnee exceeds its fair value as of the date of the
spin-off. After recognizing any impairment, the spinnor should derecognize the
spinnee’s assets and liabilities on the date of the spin-off at their carrying
amounts in the spinnor’s financial statements. However, there is no U.S. GAAP
guidance on recognizing an impairment loss as of the distribution date for other
nonreciprocal transfers that are not spin-offs.
Bridging the GAAP
Under IFRS 5, a long-lived asset to be distributed to owners is measured at
fair value less costs to sell in a manner similar to assets held for sale.
Questions have arisen about situations in which a spinnor disposes of a business in a
spin-off before an initial public offering of the spinnor. In such cases, the
spinnor should reflect the disposal as either (1) a disposal to which
discontinued-operations reporting may or may not apply or, in limited circumstances,
(2) a change in the reporting entity. If the disposal is reflected as a change in
the reporting entity, the spinnee’s operations would be removed from the spinnor’s
financial statements as if the spinnor never held the business. SAB Topic 5.Z.7
provides the SEC staff’s views on this topic.
SEC Staff Accounting Bulletins
SAB Topic 5.Z.7,
Accounting for the Spin-Off of a Subsidiary
[Reproduced in ASC 505-60-S99-1]
Facts: A Company disposes of a business through the
distribution of a subsidiary’s stock to the Company’s
shareholders on a pro rata basis in a transaction that is
referred to as a spin-off.
Question: May the Company elect to characterize the
spin-off transaction as resulting in a change in the
reporting entity and restate its historical financial
statements as if the Company never had an investment in the
subsidiary, in the manner specified by FASB ASC Topic 250,
Accounting Changes and Error Corrections?
Interpretive Response: Not ordinarily. If the Company
was required to file periodic reports under the Exchange Act
within one year prior to the spin-off, the staff believes
the Company should reflect the disposition in conformity
with FASB ASC Topic 360. This presentation most fairly and
completely depicts for investors the effects of the previous
and current organization of the Company. However, in limited
circumstances involving the initial registration of a
company under the Exchange Act or Securities Act, the staff
has not objected to financial statements that retroactively
reflect the reorganization of the business as a change in
the reporting entity if the spin-off transaction occurs
prior to effectiveness of the registration statement. This
presentation may be acceptable in an initial registration if
the Company and the subsidiary are in dissimilar businesses,
have been managed and financed historically as if they were
autonomous, have no more than incidental common facilities
and costs, will be operated and financed autonomously after
the spin-off, and will not have material financial
commitments, guarantees, or contingent liabilities to each
other after the spin-off. This exception to the prohibition
against retroactive omission of the subsidiary is intended
for companies that have not distributed widely financial
statements that include the spun-off subsidiary. Also,
dissimilarity contemplates substantially greater differences
in the nature of the businesses than those that would
ordinarily distinguish reportable segments as defined by
FASB ASC paragraph 280-10-50-10 (Segment Reporting Topic).
All requirements in SAB Topic 5.Z.7 must be met for the spinnor to reflect the
transaction as a change in the reporting entity. Depending on the extent of judgment
an entity needs to use in applying SAB Topic 5.Z.7, as well as the significance of
the judgment applied to the spinnor’s financial statements, an entity contemplating
an initial public offering may consider consulting with the SEC staff on a prefiling
basis.
If the spinnor presents a spin-off as a disposal, it must also
assess whether the spin-off should be presented as a discontinued operation. Because
the spinnee must be classified as held and used until the spin-off occurs, even if
the spinnee is expected to meet the discontinued-operations reporting criteria, the
spinnor cannot present the spinnee’s operations, including the direct costs of the
spin-off, in discontinued operations until the shares are distributed to the owners.
Example 4-2
Company B, a public company, announced its
intent to spin off one of its segments, Segment H, into a
separate public company. Before its calendar year ending
December 31, 20X8, B filed a Form 10 with the SEC and
received approval from its board of directors and
shareholders to distribute H to its shareholders in a
spin-off. On December 27, 20X8, shares of B were traded as
“ex-dividend.” The record date of distribution was January
2, 20X9, and the distribution date was January 6, 20X9.
Under ASC 360-10-40-4, the asset group that
is to be distributed to owners in a spin-off is disposed of
when it is distributed. Until the shares are distributed to
the shareholders on January 6, 20X9, the asset group should
continue to be classified as held and used and continue to
be reported in continuing operations.
4.5 Other Nonreciprocal Transfers Other Than Spin-Offs
While other nonreciprocal transfers of long-lived assets (e.g.,
split-offs, dividends-in-kind, common-control transfers, or donations) are not
specifically addressed in U.S. GAAP, we believe that such transfers are also
disposals other than by sale, regardless of whether they are measured at historical
cost or fair value in the transferring entity’s books. Thus, we believe that, by
analogy to the guidance in ASC 845-10-30-10, the assets being distributed in a
nonreciprocal exchange should remain classified as held and used until the
distribution occurs.
4.5.1 Common-Control Transactions
As discussed in Appendix B.4.3 of Deloitte’s Roadmap
Business
Combinations, the transferring entity typically accounts
for the transfer of assets in a common-control transaction as a disposition in
accordance with ASC 360-10. We believe that, while not specifically addressed in
the guidance, the net assets to be disposed of in a common-control transaction
should be classified as held and used until they are exchanged or distributed in
the same manner as net assets to be distributed in a spin-off. Therefore, the
net assets to be transferred in a common-control transaction should be
considered disposed of “other than by sale” and should not be classified as held
for sale in the periods before they are exchanged or distributed, even if the
transferring entity will receive consideration as part of the exchange.
ASC 360-10-40-4 requires that a spinnor recognize an impairment
loss on the date on which long-lived assets are distributed in a spin-off if the
carrying amount of the assets (disposal group) exceeds their fair value. While a
common-control transaction is accounted for as a disposal other than by sale in
the same manner as a spin-off transaction, we do not believe that the
transferring entity is required to recognize an impairment loss if the carrying
amount of the assets to be distributed in a common-control transaction exceeds
their fair value. Rather, we believe that the FASB intended for the guidance in
ASC 360-10-40-4 to address the impairment guidance in ASC 845-10-30-10
explicitly referring to a distribution to owners in a spin-off transaction and
that this guidance should not be extended to transfers of assets under common
control of the same parent.
However, ASC 360-10-35-21 requires that an entity test a
long-lived asset (asset group) classified as held and used for impairment
whenever “events or changes in circumstances indicate that its carrying amount
may not be recoverable.” Therefore, the transferring entity should consider
whether the common-control transaction indicates that the long-lived assets
(asset group) to be transferred should be tested for impairment under the
held-and-used model before the disposal date. ASC 360-10-40-4 clarifies that
even if the entity intends to distribute assets in a spin-off transaction, the
assets should be tested for recoverability, if necessary, as if they are held
and used, and the estimates of future cash flows used in the recoverability test
should be based on the use of the assets for their remaining useful life,
provided that the disposal transaction will not occur. We believe that the same
approach should be applied to assets to be distributed in a common-control
transaction if the transferring entity determines that a triggering event has
occurred and that the assets should be tested for recoverability before they are
transferred.