5.6 A Business or Nonprofit Activity Classified as Held for Sale Upon Acquisition

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5.6 A Business or Nonprofit Activity Classified as Held for Sale Upon Acquisition

ASC 205-20

A Discontinued Operation Comprising a Business or Nonprofit Activity

45-1D A business or nonprofit activity that, on acquisition, meets the criteria in paragraph 205-20-45-1E to be classified as held for sale is a discontinued operation. If the one-year requirement in paragraph 205-20-45-1E(d) is met (except as permitted by paragraph 205-20-45-1G), a business or nonprofit activity shall be classified as held for sale as a discontinued operation at the acquisition date if the other criteria in paragraph 205-20-45-1E are probable of being met within a short period following the acquisition (usually within three months).

Pending Content (Transition Guidance: ASC 805-60-65-1)

45-1D A business or nonprofit activity that, on acquisition or upon formation of a joint venture, meets the criteria in paragraph 205-20-45-1E to be classified as held for sale is a discontinued operation. If the one-year requirement in paragraph 205-20-45-1E(d) is met (except as permitted by paragraph 205-20-45-1G), a business or nonprofit activity shall be classified as held for sale as a discontinued operation at the acquisition date or the formation date if the other criteria in paragraph 205-20-45-1E are probable of being met within a short period following the acquisition date or the formation date (usually within three months).

Changing Lanes

In August 2023, the FASB issued ASU 2023-05, under which an entity that qualifies as either a joint venture or a corporate joint venture (as defined in the ASC master glossary, is required 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.

Specifically, 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.

A business or nonprofit activity that meets the held-for-sale classification criteria on acquisition (see Section 3.5.5) is reported as a discontinued operation regardless of whether its disposal will represent a strategic shift or have a major effect on the entity’s operations or financial results. The FASB’s rationale was that if an entity classifies a business as held for sale at the time of acquisition, the business was never considered part of an entity’s continuing operations and should therefore be reported in discontinued operations.

See Section 7.10 for a description of the related disclosure requirements, which are more limited than those for other types of disposals.

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