5.5 Continuing Involvement

While ASC 205-20 does not preclude discontinued-operations reporting if the entity has continuing involvement with the disposed-of component, we believe that entities should consider the nature, time frame, and extent of any continuing involvement in determining whether there has been a strategic shift that has (or will have) a major effect on their operations and financial results. Continuing involvement may be indicated by, for example, (1) supply chain and distribution agreements, (2) financial guarantees, (3) options to repurchase assets that were disposed of, and (4) retained equity method investments (but generally not retained cost method investments).

ASC 205-20-50-4A and 50-4B require entities to disclose the nature of any significant continuing involvement with a discontinued operation after the disposal date. See Section 7.7.3 for more information about those disclosure requirements.

ASC 205-20-55-97 through 55-101 contain the following example of a disposal transaction in which the entity retains a significant investment in the discontinued operation:

ASC 205-20

Example 5: Sports Equipment Manufacturer

55-97 This Example provides an illustration of the guidance in paragraphs 205-20-45-1B through 45-1C. In this Example, the entity sells 80 percent of a group of components of an entity representing a strategic shift that has a major effect on the entity’s operations and financial results and is reported in discontinued operations.

55-98 An entity that manufactures and sells sports equipment has two product lines that serve the football and baseball markets. Each product line includes several different brands that each comprise operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. Therefore, for that entity, each product line includes a group of components of the entity.

55-99 The entity decides to shift its strategy of trying to sell products to the baseball equipment market, which accounts for 40 percent of its revenues, and focus more on serving its customers in the football equipment market. However, the entity decides to retain some exposure to the baseball equipment market by selling only 80 percent of the group of components in its product line that serves the baseball market to another entity.

55-100 Because the entity decides to shift its strategy of trying to sell products to the baseball equipment market by selling 80 percent of the group of components of the entity in that product line and because the portion sold comprises a major part of the entity’s operations and financial results, its disposal represents a strategic shift that is reported in discontinued operations.

55-101 Because of the entity’s significant continuing involvement after the disposal date, the entity provides the disclosures required by paragraphs 205-20-50-4A through 50-4B.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.