Chapter 7 — Presentation and Disclosure Requirements for Disposals That Are Reported as Discontinued Operations
Chapter 7 — Presentation and Disclosure Requirements for Disposals That Are Reported as Discontinued Operations
7.1 Overview
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 reclassified to discontinued operations in the statement of operations,
retrospectively, for all periods presented. In addition, the assets and liabilities
of the disposal group must be presented separately on the face of the balance sheet
both in the current period (if held for sale) and in prior periods.
7.2 Balance Sheet Presentation of Discontinued Operations
ASC 205-20
45-10 In 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. Those assets and
liabilities shall not be offset and presented as a
single amount. If a discontinued operation is part
of a disposal group that includes other assets and
liabilities that are not part of the discontinued
operation, an entity may present the assets and
liabilities of the disposal group separately in
the asset and liability sections, respectively, of
the statement of financial position. If a
discontinued operation is disposed of before
meeting the criteria in paragraph 205-20-45-1E to
be classified as held for sale, an entity shall
present the assets and liabilities of the
discontinued operation separately in the asset and
liability sections, respectively, of the statement
of financial position for the periods presented in
the statement of financial position before the
period that includes the disposal. When an entity
separately presents in prior periods the assets
and liabilities of a discontinued operation, the
entity shall not apply the guidance in paragraph
360-10-35-43 as if those assets and liabilities
were held for sale in those prior periods.
Under ASC 205-20-45-10, in the period in which a component meets the
held-for-sale and discontinued-operations
criteria, an entity must present the assets and
liabilities of the discontinued operation
separately in the asset and liability sections of
the balance sheet. Assets and liabilities cannot
be offset and presented as a single amount. ASC
205-20-45-10 also requires that an entity
reclassify not only the current-period balance
sheet but also any comparative balance sheets
presented. For example, a discontinued operation
that is classified as held for sale and sold in
the same reporting period would be presented as
held for sale in prior-period balance sheets (but
not in the current-period balance sheet).
Similarly, the assets and liabilities of a
discontinued operation that is abandoned in the
current period would be reclassified in the
prior-period balance sheet. “Held for sale” or
“held for disposition” presentation in the prior
periods is appropriate even if the discontinued
operation did not meet the criteria to be
classified as held for sale (or was not yet
disposed of other than by sale) in those prior
periods. Similar presentation in the prior periods
would also be appropriate for the assets and
liabilities to be transferred in a spin-off
transaction, but such presentation would not be
reflected until after the spin-off actually
occurs (see Section
4.4).
ASC 205-20 does not address whether entities should separately present the
assets and liabilities of a discontinued operation
as current and noncurrent. We believe that it is
appropriate to do so and that four balance sheet
captions may result from such presentation (e.g.,
“current assets held for sale,” “noncurrent assets
held for sale,” “current liabilities held for
sale,” and “noncurrent liabilities held for
sale”). In addition, we believe that it is
acceptable for an entity to present the assets and
liabilities of a discontinued operation classified
as held for sale as current in the current-period
balance sheet if it is probable that the sale will
occur, proceeds will be collected within one year,
and the proceeds are not expected to be used to
settle long-term debt. See Section 13.3.3.5 of
Deloitte’s Roadmap Issuer’s Accounting for Debt
for more information about financial statement
presentation related to disposals in which
proceeds will be used to settle long-term debt. We
think that the current and noncurrent
classifications of a discontinued operation’s
assets and liabilities should not change in prior
periods because the noncurrent assets and
liabilities did not meet the criteria for
presentation as current in those prior
periods.
In the period in which a component meets the criteria for presentation in
discontinued operations, the entity must provide detailed information about the
assets and liabilities of the discontinued operation. Therefore, the major classes
of the discontinued operation’s assets and liabilities must be either (1) presented
on the face of the balance sheet in accordance with ASC 205-20-45-11 or (2)
disclosed in the notes in accordance with ASC 205-20-50-5B(e) (see Section 7.8.1).
Such presentation or disclosure must be provided for the discontinued operation in the current
period and all prior periods presented. If the major classes of assets and liabilities of a discontinued
operation are disclosed in the notes, the disclosure must be reconciled to the amounts presented
on the balance sheet, and if the disposal group includes assets or liabilities that are not part of the
discontinued operation, the reconciliation should show them separately from the assets and liabilities of
the discontinued operation. Entities will need to apply judgment in determining what constitutes “major”
with respect to such presentation or disclosure, since ASC 205-20 does not provide guidance on this
topic.
SEC registrants
should also evaluate the reporting considerations discussed in Chapter 8.
Example 7-1
Illustrative Balance Sheet Presentation of a Discontinued Operation
Below is an example of a simplified comparative balance sheet presentation for a component that meets the
criteria to be presented as a discontinued operation in the current period.
See Example 7-7 for an
illustration of the disclosure in the notes to financial statements (see ASC
205-20-50-5B(e)) of the discontinued operation’s major classes of assets and
liabilities classified as held for sale for all periods presented in the statement
of financial position.
7.3 Income Statement Presentation of Discontinued Operations
ASC 205-20
45-3 The statement in which
net income of a business entity is reported or the
statement of activities of a not-for-profit entity
(NFP) for current and prior periods shall report
the results of operations of the discontinued
operation, including any gain or loss recognized
in accordance with paragraph 205-20-45-3C, in the
period in which a discontinued operation either
has been disposed of or is classified as held for
sale.
45-3A The results of all discontinued operations, less applicable income taxes (benefit), shall be reported
as a separate component of income. For example, the results of all
discontinued operations may be reported in the statement where net income of a business entity is reported
as follows.
45-3B A gain or loss recognized on the disposal (or loss recognized on classification as held for sale) shall be
presented separately on the face of the statement where net income is reported or disclosed in the notes to
financial statements (see paragraph 205-20-50-1(b)).
45-11 For any discontinued operation initially classified as held for sale in the current period, an entity shall
either present on the face of the statement of financial position or disclose in the notes to financial statements
(see paragraph 205-20-50-5B(e)) the major classes of assets and liabilities of the discontinued operation
classified as held for sale for all periods presented in the statement of financial position. Any loss recognized on
a discontinued operation classified as held for sale in accordance with paragraphs 205-20-45-3B through 45-3C
shall not be allocated to the major classes of assets and liabilities of the discontinued operation.
In the period in which a component meets the criteria for presentation as a
discontinued operation, the component’s results of operations, including any gain or
loss recognized, should be reclassified to discontinued operations. The illustration
in ASC 205-20-45-3A shows a possible income statement presentation related to such
reclassification; however, the illustration depicts a single-year presentation only.
If comparative income statements are presented, an entity should also reclassify the
component’s results of operations to discontinued operations for all prior periods.
See Example 7-2 for an
illustration of a multiyear presentation.
In the illustration in ASC 205-20-45-3A, the income tax benefit and the loss on disposal are presented as
separate line items; however, entities may (1) present discontinued operations as a single line item that
is labeled, for example, “discontinued operations net of tax,” and (2) disclose, in the notes, the income
tax benefit or expense and the gain or loss recognized.
See Section 3.5 for
more information about the requirement in ASC 205-20-45-11 that any loss should not
be allocated to specific assets or classes of assets.
Under ASC 205-20, in the period in which the discontinued-operations criteria are met, an entity must
report the disposal in discontinued operations retrospectively in all periods presented. SEC registrants
should also evaluate the reporting considerations discussed in Chapter 8.
Example 7-2
Illustrative Income Statement Presentation of a Discontinued Operation
This example is a continuation of Example 7-1 and shows a simplified, comparative
income statement for a component that meets the criteria for
presentation as a discontinued operation in the current
period.
See Example 7-8 for
an illustration of the disclosure in the notes to the financial statements (see ASC
205-20-50-5B(b)) of the major classes of line items constituting a discontinued
operation’s pretax profit or loss.
7.4 Presentation of Income Statement Items in Discontinued Operations
7.4.1 Asset Impairment Charges
Impairment charges related to the assets of a disposal group reported in
discontinued operations should be included in discontinued operations in the
current and prior periods, respectively. Such charges might include impairments
related to PP&E, intangible assets, and goodwill. It may be appropriate to
calculate the amount of a goodwill impairment charge on a relative fair value
basis if the goodwill assigned to the disposal group was calculated on a
relative fair value basis (see Section 3.4.1). Because ASC 350 requires disclosure of
cumulative goodwill impairment amounts, it is necessary to reasonably measure
cumulative goodwill impairments, if any, related to businesses disposed of to
eliminate such amounts from this ongoing disclosure.
7.4.2 Adjustments to Amounts Previously Reported in Discontinued Operations
ASC 205-20-45-4 states that “[a]djustments to amounts previously reported in
discontinued operations in a prior period shall be presented separately in the
current period in the discontinued operations section of the statement where net
income is reported.”
See Section 7.7.2 for
related disclosure requirements associated with adjustments to amounts
previously reported.
7.4.2.1 Classification and Disclosure of Contingencies
ASC 205-20-45-5 indicates that the resolution of certain contingencies
represents an adjustment to amounts previously reported and should be
recognized in discontinued operations in the current period. In SAB Topic
5.Z.5 (codified in ASC 205-20-S99-2), the SEC staff provided the guidance
below on the classification and disclosure of contingencies related to
discontinued operations. While the SAB was not revised to reflect the
amendments made by ASU
2014-08, we believe that it continues to provide
relevant guidance.
SEC Staff Accounting Bulletins
SAB Topic 5.Z.5,
Classification and Disclosure of Contingencies
Relating to Discontinued Operations
[Reproduced in ASC 205-20-S99-2]
Facts: A
company disposed of a component of an entity in a
previous accounting period. The Company received
debt and/or equity securities of the buyer of the
component or of the disposed component as
consideration in the sale, but this financial
interest is not sufficient to enable the Company to
apply the equity method with respect to its
investment in the buyer. The Company made certain
warranties to the buyer with respect to the
discontinued business, or remains liable under
environmental or other laws with respect to certain
facilities or operations transferred to the buyer.
The disposition satisfied the criteria of FASB ASC
Subtopic 205-20 for presentation as “discontinued
operations.” The Company estimated the fair value of
the securities received in the transaction for
purposes of calculating the gain or loss on disposal
that was recognized in its financial statements. The
results of discontinued operations prior to the date
of disposal or classification as held for sale
included provisions for the Company’s existing
obligations under environmental laws, product
warranties, or other contingencies. The calculation
of gain or loss on disposal included estimates of
the Company’s obligations arising as a direct result
of its decision to dispose of the component, under
its warranties to the buyer, and under environmental
or other laws. In a period subsequent to the
disposal date, the Company records a charge to
income with respect to the securities because their
fair value declined materially and the Company
determined that the decline was other than
temporary. The Company also records adjustments of
its previously estimated liabilities arising under
the warranties and under environmental or other
laws.
Question 1:
Should the writedown of the carrying value of the
securities and the adjustments of the contingent
liabilities be classified in the current period’s
statement of operations within continuing operations
or as an element of discontinued operations?
Interpretive
Response: Adjustments of estimates of
contingent liabilities or contingent assets that
remain after disposal of a component of an entity or
that arose pursuant to the terms of the disposal
generally should be classified within discontinued
operations.FN56 However, the staff
believes that changes in the carrying value of
assets received as consideration in the disposal or
of residual interests in the business should be
classified within continuing operations.
FASB ASC paragraph 205-20-45-4
requires that “adjustments to amounts previously
reported in discontinued operations that are
directly related to the disposal of a component of
an entity in a prior period shall be classified
separately in the current period in discontinued
operations.” The staff believes that the provisions
of FASB ASC paragraph 205-20-45-4 apply only to
adjustments that are necessary to reflect new
information about events that have occurred that
becomes available prior to disposal of the component
of the entity, to reflect the actual timing and
terms of the disposal when it is consummated, and to
reflect the resolution of contingencies associated
with that component, such as warranties and
environmental liabilities retained by the
seller.
Developments subsequent to the
disposal date that are not directly related to the
disposal of the component or the operations of the
component prior to disposal are not “directly
related to the disposal” as contemplated by FASB ASC
paragraph 205-20-45-4. Subsequent changes in the
carrying value of assets received upon disposition
of a component do not affect the determination of
gain or loss at the disposal date, but represent the
consequences of management’s subsequent decisions to
hold or sell those assets. Gains and losses,
dividend and interest income, and portfolio
management expenses associated with assets received
as consideration for discontinued operations should
be reported within continuing operations.
Question 2:
What disclosures would the staff expect regarding
discontinued operations prior to the disposal date
and with respect to risks retained subsequent to the
disposal date?
Interpretive
Response: MD&AFN57 should
include disclosure of known trends, events, and
uncertainties involving discontinued operations that
may materially affect the Company’s liquidity,
financial condition, and results of operations
(including net income) between the date when a
component of an entity is classified as discontinued
and the date when the risks of those operations will
be transferred or otherwise terminated. Disclosure
should include discussion of the impact on the
Company’s liquidity, financial condition, and
results of operations of changes in the plan of
disposal or changes in circumstances related to the
plan. Material contingent
liabilities,FN58 such as product or
environmental liabilities or litigation, that may
remain with the Company notwithstanding disposal of
the underlying business should be identified in
notes to the financial statements and any reasonably
likely range of possible loss should be disclosed
pursuant to FASB ASC Topic 450, Contingencies.
MD&A should include discussion of the reasonably
likely effects of these contingencies on reported
results and liquidity. If the Company retains a
financial interest in the discontinued component or
in the buyer of that component that is material to
the Company, MD&A should include discussion of
known trends, events, and uncertainties, such as the
financial condition and operating results of the
issuer of the security, that may be reasonably
expected to affect the amounts ultimately realized
on the investments.
________________________________________
FN56 Registrants are
reminded that FASB ASC Topic 460, Guarantees
requires recognition and disclosure of certain
guarantees which may impose accounting and
disclosure requirements in addition to those
discussed in this SAB Topic.
FN57 Item 303 of
Regulation S-K.
FN58 Registrants also
should consider the disclosure requirements of FASB
ASC Topic 460.
Example 7-3
Classification of a Gain Related to a Retained Equity Interest Sold in a Subsequent Period
Company D, an SEC registrant, is proposing to sell a significant subsidiary, Company T, which qualifies for
reporting as a discontinued operation. Because this transaction arose from an unexpected offer from Company
X, a third party, D does not have immediate plans for use of the proceeds from this sale. Accordingly, D would
like to retain an equity interest (common stock) of up to 10 percent for the next four to five years.
In addition, D has a put option on the retained equity interest in T to sell this interest over a four-year period
to X. Company X also would receive a call option to purchase the equity interest retained by D at the end of the
four-year period.
The gains resulting from D’s exercise of its put option to sell a portion of its retained interest in T, or the gains
resulting from X’s exercise of its call option to purchase the remaining interest in T, should be reported in
continuing operations since they (1) are not directly related to D’s initial sale of T to X and (2) have resulted
from management’s decision to hold and then sell a cost method investment. Furthermore, any increases or
decreases that may need to be reflected under other authoritative accounting pronouncements (e.g., ASC
320-10 and ASC 815) would be reported in continuing operations.
7.4.2.2 Settlement of Employee Benefit Plan Obligations
ASC 205-20-45-5(c) states that the “settlement of employee benefit plan
obligations (pension, postemployment benefits other than pensions, and other
postemployment benefits)” should be presented in discontinued operations in
the current period “provided that the settlement is directly related to the
disposal transaction.” This paragraph further notes that a “settlement is
directly related to the disposal transaction if there is a demonstrated
direct cause-and-effect relationship and the settlement occurs no later than
one year following the disposal transaction, unless it is delayed by events
or circumstances beyond an entity’s control.” ASC 715-30-55-193 and ASC
715-30-55-196 and 55-197 provide additional guidance on this topic, and ASC
715-30-55-239 through 55-252 contain a related example.
7.4.3 Allocation of Interest to Discontinued Operations
ASC 205-20
45-6 Interest on debt that is to be assumed by the buyer and interest on debt that is required to be repaid as
a result of a disposal transaction shall be allocated to discontinued operations.
45-7 The allocation to discontinued operations of other consolidated interest that is not directly attributable
to or related to other operations of the entity is permitted but not required. Other consolidated interest that
cannot be attributed to other operations of the entity is allocated based on the ratio of net assets to be sold or
discontinued less debt that is required to be paid as a result of the disposal transaction to the sum of total net
assets of the consolidated entity plus consolidated debt other than the following:
- Debt of the discontinued operation that will be assumed by the buyer
- Debt that is required to be paid as a result of the disposal transaction
- Debt that can be directly attributed to other operations of the entity.
45-8 This allocation assumes
a uniform ratio of consolidated debt to equity for all
operations (unless the assets to be sold are atypical —
for example, a finance company — in which case a normal
debt-equity ratio for that type of business may be
used). If allocation based on net assets would not
provide meaningful results, then the entity shall
allocate interest to the discontinued operations based
on debt that can be identified as specifically
attributed to those operations. This guidance applies to
income statement presentation of both continuing and
discontinued operations (including the presentation of
the gain or loss on disposal of a component of an
entity). A decision as to interest allocation shall be
applied consistently to all discontinued operations.
Interest expense and amortization of discounts, premiums, and debt issuance costs related to debt that
will be assumed by the buyer or debt that must be repaid as a result of a disposal transaction should be
reported in discontinued operations. We also believe that gains or losses (e.g., prepayment penalties)
from the extinguishment of debt that is directly related to the component being disposed of should be
included in discontinued operations.
ASC 205-20-45-7 states that “[t]he allocation to discontinued
operations of other consolidated interest that is not directly attributable to
or related to other operations of the entity is permitted but not required.”
Entities that choose to allocate other consolidated interest to the discontinued
operation should use the allocation approach described in ASC 205-20-45-7 and
45-8, under which a “uniform ratio of consolidated debt to equity for all
operations” is assumed unless such an allocation would not provide meaningful
results. In that case, the entity must “allocate interest to the discontinued
operations based on debt that can be identified as specifically attributed to
those operations.” In addition, we believe that if an entity chooses to allocate
other consolidated interest to the discontinued operation, the entity should use
the same allocation method to allocate amortization of discounts, premiums, and
debt issuance costs.
ASC 205-20-45-8 also states that “[a] decision as to interest
allocation shall be applied consistently to all discontinued operations.”
Further, as noted in ASC 205-20-S99-3:
The SEC staff will
expect registrants electing to allocate interest in accordance with
paragraph 205-20-45-6 to clearly disclose the accounting policy (including
the method of allocation) and the amount allocated to and included in
discontinued operations for all periods presented.
7.4.4 Allocating Direct Expenses (but Not Indirect Expenses) to Discontinued Operations
ASC 205-20
45-9 General corporate overhead shall not be allocated to discontinued operations.
An entity should only include in discontinued operations direct operating expenses incurred by
the discontinued operation that (1) are clearly identifiable as costs of the component (or group of
components) being disposed of and (2) the entity will not continue to recognize on an ongoing basis.
Indirect expenses, such as allocated corporate overhead, should not be included in discontinued
operations.
Example 7-4
Costs That Are Not Costs of the Component
A company allocates the salary costs of its executive committee to all of its divisions on the basis of total
revenues. No executive has direct responsibility for the division being disposed of; however, two executives
will be transferred with the division. The division meets the criteria for reporting in discontinued operations.
Because the costs are not clearly related to the division, the company may not include the salaries of the
transferred executives in discontinued operations.
Connecting the Dots
ASC 420-10-S99-1 contains the following guidance on presentation of
restructuring changes in discontinued operations:
The following is the text of SAB Topic 5.P.3, Income Statement
Presentation of Restructuring Charges.
Facts: Restructuring charges often
do not relate to a separate component of the entity, and, as
such, they would not qualify for presentation as losses on the
disposal of a discontinued operation.
Therefore, only restructuring changes that are directly related to the
component (or components) to be disposed of may be included in
discontinued operations.
7.4.5 Allocating the Cost of Shared Assets to Discontinued Operations
Certain assets may be shared by components that will be disposed of and components that will be
retained. If an entity will retain the shared assets, the expenses related to the shared assets should not
be allocated to the discontinued operation because the entity will continue to recognize such costs on
an ongoing basis.
Example 7-5
Allocation of Part of an Asset’s Cost to Discontinued Operations
Company T, a public entity, currently reports three segments. In the current year, T implements a new
computer system that is purchased centrally and implemented and tailored separately for each of the three
segments. After implementing the computer system, T enters into an agreement to sell one of the segments.
The disposition of the segment will be reported as a discontinued operation.
Because T is retaining the central computer system and is not including it in the disposal group, T may not
allocate a portion of the overall costs incurred on the new computer system to the discontinued operation
being disposed of. In addition, if T recognizes any impairment related to the central computer system, the
impairment would not be included in discontinued operations.
7.4.6 Intercompany Sales Between an Entity and a Discontinued Operation
We believe that if an entity and its discontinued operation had intercompany
purchases and sales that were eliminated in consolidation, it is appropriate to
gross up and recast those sales and expenses in continuing operations and
discontinued operations if such sales or purchases will continue with the
discontinued operation after the disposal. As a result, the amount of
intercompany revenue and expenses that will remain with the consolidated group
after the disposal would be reflected in continuing operations and the amount of
intercompany revenue and expenses that will be disposed of would be presented in
discontinued operations. However, such presentation would not be appropriate for
intercompany sales for which the inventory has not yet been sold to third-party
customers. To gross up revenue and expenses for inventory that has not yet been
sold to third-party customers would result in the presentation of revenue and
expenses that exceed the amounts the entity would have reported in its
consolidated financial statements after intercompany eliminations.
Example 7-6
Presentation of Intercompany Sales Related to a Discontinued
Operation
Company A is a paper manufacturing
company and owns a distribution business, Subsidiary X,
that buys paper from A and then sells the paper to
outside customers. In its consolidated financial
statements, A has appropriately eliminated the
intercompany sales between itself and X and therefore
only recognizes the sales from X to customers.
Company A is planning to sell X to
another paper manufacturer. After the disposal, X will
continue to purchase paper from A to sell to outside
customers. Therefore, A will continue to have sales to X
that will not be eliminated when X is no longer a
subsidiary. Company A has concluded that even though it
will have continuing involvement with X after the
disposition, the disposition of X should be presented in
discontinued operations.
Assume that during the reporting period, A sells paper to
X for $6 and makes a profit of $2 (i.e., cost of $4) and
that X sells paper to outside customers for $7 and makes
a profit of $1. In A’s consolidated financial
statements, the intercompany sales of $6 will be
eliminated along with the $6 cost of sales, leaving a
profit of $3, as follows:
Therefore, A would present the following:
- In continuing operations, revenue of $6, cost of sales of $4, and a profit of $2 representing the sales from A to X.
- In discontinued operations, a profit of $1 representing the sales from X to outside customers.
After the disposal (if the facts are the same), when A
sells paper to X, it will have the same $6 sale, $4 cost
of sales, and $2 profit in its continuing operations and
will not have the additional $1 profit from sales to the
outside customers.
This presentation only applies to paper
that was sold to third-party customers during the
reporting period. Any profit on intercompany
transactions between A and X for which the paper has not
been sold to third-party customers during the reporting
period should be eliminated.
7.4.7 Transition Services
When a component is sold or spun off, an entity often enters into agreements with the buyer or with the
component to provide certain services to the component, usually for a specified period (e.g., one year).
Such arrangements are often called “transition service arrangements.” The revenues and expenses
associated with transition services provided to a discontinued operation after its disposal should be
reported in continuing operations because such services are part of the entity’s continuing activities. The
entity should use judgment in determining the income statement line item in which to report the income
and expenses. For example, revenues from transition services would generally be recognized as other
income if the services are not part of the entity’s recurring revenue-generating activities.
7.4.8 Changes in the Carrying Value of Assets Received as Consideration
In some transactions, an entity may receive noncash consideration in exchange
for a discontinued operation. Question 1 from SAB Topic 5.Z.5 (codified in ASC
205-20-S99-2) states:
[T]he staff believes that changes in
the carrying value of assets received as consideration in the disposal or of
residual interests in the business should be classified within continuing
operations. . . . Subsequent changes in the carrying value of assets
received upon disposition of a component do not affect the determination of
gain or loss at the disposal date, but represent the consequences of
management’s subsequent decisions to hold or sell those assets. Gains and
losses, dividend and interest income, and portfolio management expenses
associated with assets received as consideration for discontinued operations
should be reported within continuing operations.
7.4.9 Income Taxes
See Deloitte’s Roadmap Income Taxes for more information about income taxes
related to discontinued operations.
7.5 Overview of Disclosures About Discontinued Operations
ASC 205-20
05-2
The required disclosures about discontinued operations vary
depending on the nature of the discontinued operation. For
example, if a discontinued operation includes a component or
group of components of an entity that is not an equity
method investment, a more comprehensive set of disclosures
about the discontinued operation is required. If the
discontinued operation includes an equity method investment,
or a business or nonprofit activity that is classified as
held for sale on acquisition, a more limited set of
disclosures is required (see the flowchart in paragraph
205-20-55-82 for an illustration).
Under ASC 205-20, certain disclosures are required for all disposals that qualify as
a discontinued operation; however, the disclosure requirements for disposals of an
equity method investment or a business or nonprofit activity classified as held for
sale on acquisition are more limited.
See Section 7.11 for a flowchart that provides an overview of
the disclosures required for discontinued operations.
7.6 Disclosures That Apply to All Discontinued Operations
The disclosures in ASC 205-20-50-1 below are required in periods in which a
discontinued operation is classified as held for sale or has been otherwise disposed
of, including disposals of equity method investments and newly acquired businesses
or nonprofit activities classified as held for sale at acquisition.
ASC 205-20
50-1 The following shall be disclosed in the notes to financial statements that cover the period in which a discontinued operation either has been disposed of or is classified as held for sale under the requirements of paragraph 205-20-45-1E:
- A description of both of the following:
- The facts and circumstances leading to the disposal or expected disposal
- The expected manner and timing of that disposal.
- If not separately presented on the face of the statement where net income is reported (or statement of activities for a not-for-profit entity) as part of discontinued operations (see paragraph 205-20-45-3B), the gain or loss recognized in accordance with paragraph 205-20-45-3C.
- Subparagraph superseded by Accounting Standards Update No. 2014-08
- If applicable, the segment(s) in which the discontinued operation is reported under Topic 280 on segment reporting.
7.7 Other Required Disclosures
The disclosures in ASC 205-20-50-3 through 50-4B concern changes to a plan of
sale, adjustments to amounts previously reported, and continuing involvement. These
disclosures must be provided for all discontinued operations to which these events
or circumstances apply.
7.7.1 Changes to a Plan of Sale
ASC 205-20
50-3 An entity may change its plan of sale as addressed in paragraph 360-10-35-44 or paragraph 360-10-35-45. In the period in which the decision is made to change the plan for selling the discontinued operation, an
entity shall disclose in the notes to financial statements a description of the facts and circumstances leading
to the decision to change that plan and the change’s effect on the results of operations for the period and any
prior periods presented.
As described in ASC 205-20-45-1F, an entity may change its plan and decide not
to sell a component that was classified as held for sale and presented in
discontinued operations. In the period in which the discontinued operation no
longer meets the held-for-sale criteria, both the balance sheet and income
statement should be reclassified for all periods presented (i.e., the assets and
liabilities of the discontinued operation should be reclassified as held and
used and the operations should be reclassified to continuing operations). An
entity must also provide the above disclosures in accordance with ASC
205-20-50-3. In addition, if the entity disclosed the carrying amounts of assets
and liabilities of a disposal group, such disclosure should be removed. See
Section 3.9 for
a discussion of the accounting for changes to a plan to sell.
7.7.2 Adjustments to Amounts Previously Reported
ASC 205-20
50-3A The nature and amount of adjustments to amounts previously reported in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period shall be disclosed (see paragraph 205-20-45-5 for examples of circumstances in which those types of adjustments may arise).
ASC 205-20-45-4 states that “[a]djustments to amounts previously reported in discontinued operations in a prior period shall be presented separately in the current period in the discontinued operations section of the statement where net income is reported.”
ASC 205-20-50-3A requires disclosure of the nature and amount of such
adjustments. See Section
7.4.2 for presentation requirements and examples of adjustments to
amounts previously reported.
7.7.3 Disclosures About Continuing Involvement, Including Retained Equity Method Investments
ASC 205-20
50-4A An entity shall disclose information about its significant continuing involvement with a discontinued operation after the disposal date. Examples of continuing involvement with a discontinued operation after the disposal date include a supply and distribution agreement, a financial guarantee, an option to repurchase a discontinued operation, and an equity method investment in the discontinued operation. The disclosures are required until the results of operations of the discontinued operation in which an entity retains significant continuing involvement are no longer presented separately as discontinued operations in the statement where net income is reported (or statement of activities for a not-for-profit entity).
50-4B An entity shall disclose the following in the notes to financial statements for each discontinued operation in which the entity retains significant continuing involvement after the disposal date:
- A description of the nature of the activities that give rise to the continuing involvement.
- The period of time during which the involvement is expected to continue.
- For all periods presented, both of the following:
- The amount of any cash inflows or outflows from or to the discontinued operation after the disposal transaction
- Revenues or expenses presented, if any, in continuing operations after the disposal transaction that before the disposal transaction were eliminated in consolidated financial statements as intra-entity transactions.
- For a discontinued operation in which an entity retains an equity method investment after the disposal (the investee), information that enables users of financial statements to compare the financial performance of the entity from period to period assuming that the entity held the same equity method investment in all periods presented in the statement where net income is reported (or statement of activities for a not-for-profit entity). The disclosure shall include all of the following until the discontinued operation is no longer reported separately in discontinued operations:
- For each period presented in the statement where net income is reported (or statement of activities for a not-for-profit entity) after the period in which the discontinued operation was disposed of, the pretax income of the investee in which the entity retains an equity method investment
- The entity’s ownership interest in the discontinued operation before the disposal transaction
- The entity’s ownership interest in the investee after the disposal transaction
- The entity’s share of the income or loss of the investee in the period(s) after the disposal transaction and the line item in the statement where net income is reported (or statement of activities for a not-for-profit entity) that includes the income or loss.
As described in ASC 205-20-50-4A above, an entity must disclose “information
about its significant continuing involvement with a discontinued operation after
the disposal date.” See Section
5.5 for examples of significant continuing involvement. Because ASC
205-20 does not provide guidance on what level of continuing involvement would
be considered “significant” with respect to these disclosure requirements, an
entity will need to use judgment.
7.7.4 Entities in Bankruptcy
Entities that are in bankruptcy should consider the presentation
requirements in ASC 852-10-45-9, which states:
The statement of operations shall portray the results of
operations of the reporting entity while it is in Chapter 11. Revenues,
expenses (including professional fees), realized gains and losses, and
provisions for losses resulting from the reorganization and
restructuring of the business shall be reported separately as
reorganization items, except for those required to be reported as
discontinued operations in conformity with Subtopic 205-20.
7.8 Disclosures for a Discontinued Operation That Was Not an Equity Method Investment Before Its Disposal
ASC 205-20
50-5A Paragraphs 205-20-50-5B through 50-5D provide disclosures required for discontinued operations that
meet the criteria in paragraphs 205-20-45-1B through 45-1C except for a discontinued operation that was an
equity method investment before the disposal. For disclosures required for discontinued operations that were
equity method investments before the disposal, see paragraph 205-20-50-7.
Entities that dispose of a component that qualifies as a discontinued operation,
other than a discontinued operation that was an equity method investment before the
disposal, must disclose the information required by ASC 205-20-50-5B through 50-5D
to the extent that such information is not presented on the face of its financial
statements. See Section 7.9 for
the disclosure requirements for an equity method investment that qualifies as a
discontinued operation.
ASC 205-20
50-5B An entity shall disclose, to the extent not presented on the face of the financial statements as part of
discontinued operations, all of the following in the notes to financial statements:
- The pretax profit or loss (or change in net assets for a not-for-profit entity) of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- The major classes of line items constituting the pretax profit or loss (or change in net assets for a not-for-profit entity) of the discontinued operation (for example, revenue, cost of sales, depreciation and amortization, and interest expense) for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- Either of the following:
- The total operating and investing cash flows of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity)
- The depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- If the discontinued operation includes a noncontrolling interest, the pretax profit or loss (or change in net assets for a not-for-profit entity) attributable to the parent for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- The carrying amount(s) of the major classes of assets and liabilities included as part of a discontinued operation classified as held for sale for the period in which the discontinued operation is classified as held for sale and all prior periods presented in the statement of financial position. Any loss recognized on the discontinued operation classified as held for sale in accordance with paragraphs 205-20-45-3B through 45-3C shall not be allocated to the major classes of assets and liabilities of the discontinued operation.
50-5C If an entity provides the disclosures required by paragraph 205-20-50-5B(a), (b), and (e) in the notes to financial statements, the entity shall disclose the following:
- For the initial period in which the disposal group is classified as held for sale and for all prior periods presented in the statement of financial position, a reconciliation of both of the following:
-
The amounts disclosed in paragraph 205-20-50-5B(e)
-
Total assets and total liabilities of the disposal group classified as held for sale that are presented separately on the face of the statement of financial position. If the disposal group includes assets and liabilities that are not part of the discontinued operation, an entity shall present those assets and liabilities in line items in the reconciliations that are separate from the assets and liabilities of the discontinued operation (see paragraph 205-20-55-102 for an Example).
-
- For the periods in which the results of operations of the discontinued operation are reported in the statement where net income is reported (or statement of activities for a not-for-profit entity), a reconciliation of both of the following:
- The amounts disclosed in paragraph 205-20-50-5B(a) and (b)
- The after-tax profit or loss from discontinued operations presented on the face of the statement where net income is reported (or statement of activities for a not-for-profit entity) (see paragraph 205-20-55-103 for an Example).
50-5D For purposes of the reconciliation in paragraph 205-20-50-5C(a) or (b), an entity may aggregate the amounts that are not considered major and present them as one line item in the reconciliation.
7.8.1 Balance Sheet Disclosures for a Discontinued Operation That Was Not an Equity Method Investment Before Its Disposal
In the period in which the discontinued-operations presentation criteria are met
and for all comparative periods, the entity must provide detailed information
about the major classes of assets and liabilities of the discontinued operation.
If the entity does not present the discontinued operation’s major classes of
assets and liabilities on the face of the balance sheet in accordance with ASC
205-20-45-10 (see Section
7.2), the entity must disclose such information in the notes in
accordance with ASC 205-20-50-5B(e).
ASC 205-20-50-5C(a) also requires that the entity provide a reconciliation of the amounts disclosed in ASC 205-20-50-5B(e) to the amounts in the balance sheet. If the disposal group includes assets or liabilities that are not part of the discontinued operation, those assets should be separately presented in the reconciliation. ASC 205-20-50-5D allows entities to aggregate amounts that are not major into a single line item. ASC 205-20 does not provide any guidance on what constitutes “major” in this context. Accordingly, entities will need to use judgment.
The implementation guidance in ASC 205-20-55-102 illustrates the disclosure
requirement in ASC 205-20-50-5C(a).
ASC 205-20
55-102 The
table in this illustration provides one example of
how to disclose the reconciliation required by
paragraph 205-20-50-5C(a).
The following illustration is a continuation of Examples 7-1 and 7-2 and demonstrates how
an entity might disclose the reconciliations required by ASC
205-20-50-5C(a).
Example 7-7
Illustration of the Disclosure Requirements in ASC 205-20-50-5C(a)
7.8.2 Income Statement Disclosures for a Discontinued Operation That Was Not an Equity Method Investment Before Its Disposal
In the period in which a component meets the criteria for presentation as a discontinued operation and for all comparative periods, the entity must provide detailed information about the discontinued operation’s pretax profit or loss in accordance with ASC 205-20-50-5B(a) and the major classes of line items constituting pretax profit or loss, including any noncontrolling interest, in accordance with ASC 205-20-50-5B(b) and (d).
ASC 205-20-50-5C(b) also requires that the entity provide a reconciliation of the amounts disclosed in ASC 205-20-50-5B(a) and (b) to the amounts on the face of the income statement. ASC 205-20-50-5D allows entities to aggregate amounts that are not major into a single line item. Again, ASC 205-20 does not provide any guidance on what constitutes “major” with respect to this disclosure requirement, so entities will need to use judgment.
The implementation guidance in ASC 205-20-55-103 illustrates the disclosure
requirement in ASC 205-20-50-5C(b).
ASC 205-20
55-103 The table in this illustration provides one example of how to disclose the reconciliation required by paragraph 205-20-50-5C(b).
The following illustration is a continuation of Examples 7-1 and 7-2 and demonstrates how an entity might
disclose the reconciliations required by ASC 205-20-50-5C(b).
Example 7-8
Illustration of the Disclosure Requirements in ASC 205-20-50-5C(b)
7.8.3 Cash Flow Disclosures for a Discontinued Operation That Was Not an Equity Method Investment Before Its Disposal
ASC 205-20
50-5B An entity shall
disclose, to the extent not presented on the face
of the financial statements as part of
discontinued operations, all of the following in
the notes to financial statements: . . .
c. Either of the following:
1. The total operating
and investing cash flows of the discontinued
operation for the periods in which the results of
operations of the discontinued operation are
presented in the statement where net income is
reported (or statement of activities for a
not-for-profit entity)
2. The depreciation,
amortization, capital expenditures, and
significant operating and investing noncash items
of the discontinued operation for the periods in
which the results of operations of the
discontinued operation are presented in the
statement where net income is reported (or
statement of activities for a not-for-profit
entity).
See Section 3.3 of Deloitte’s Roadmap
Statement of Cash Flows for
more information.
7.9 Disclosures for a Discontinued Operation That Was an Equity Method Investment Before Its Disposal
ASC 205-20
50-7 For an equity method investment that meets the criteria in paragraphs 205-20-45-1B through 45-1C, an entity shall disclose summarized information about the assets, liabilities, and results of operations of the investee if that information was disclosed in financial reporting periods before the disposal in accordance with paragraph 323-10-50-3(c).
ASC 323-10-50-3(c) requires an entity to disclose summarized information about assets, liabilities, and results of operations “in the notes or in separate statements, either individually or in groups, as appropriate,” if the equity method investments “are, in the aggregate, material in relation to the financial position or results of operations of an investor.” The Board concluded that if such information was disclosed or provided in periods before the disposal, the same information should be disclosed in the period of the disposal and for all periods presented until the discontinued-operations presentation is no longer included in the financial statements. Such disclosure could enable financial statement users to understand the impact of the disposal on the entity.
7.10 Disclosures for a Business or a Nonprofit Activity Classified as Held for Sale Upon Acquisition
ASC 205-20 requires more limited disclosures for a business or nonprofit
activity that is classified as held for sale on acquisition.
Specifically, an entity must provide the disclosures required by (1)
ASC 205-20-50-1, (2) ASC 205-20-50-3 if there is a change to the
plan of sale, (3) ASC 205-20-50-3A if there are any adjustments to
amounts previously reported, and (4) ASC 205-20-50-4A and 50-4B if
the entity will have any significant continuing involvement with the
business or nonprofit activity. The entity would not be required to
provide the disclosures in ASC 205-20-50-5A through 50-7.
7.11 Flowchart of the Required Disclosures for Discontinued Operations
ASC 205-20
55-82 The following flowchart provides an overview of the disclosures required for discontinued operations.
Pending Content (Transition Guidance: ASC
805-60-65-1)
55-82 The following flowchart provides
an overview of the disclosures required for
discontinued operations.
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.
7.12 Restatement of Prior Periods Because of the Disposal of Part of an Operating Segment
ASC 280-10
55-7 If a reportable segment meets the conditions in paragraphs 205-20-45-1A through 45-1G to be reported in discontinued operations, an entity is not required to also disclose the information required by this Subtopic. Paragraph 280-10-55-19 addresses whether there is a need to restate previously reported information if there is a disposal of a component that was previously disclosed as a reportable segment.
55-19 Segment information for prior periods for disposal of a component that was previously disclosed as a reportable segment is not required to be restated. However, if the income statement and balance sheet information for the discontinued component have been reclassified in comparative financial statements, the segment information for the discontinued component need not be provided for those years. Paragraph 280-10-55-7 addresses disclosure requirements if a component of a public entity that is reported as a discontinued operation is a reportable segment.
ASC 280-10-55-7 notes that when the discontinued operation is a reportable segment, an entity is not required to separately disclose information for the discontinued operation within the segment footnote. However, if the discontinued operation is only a component of a reportable segment, the entity should not include the discontinued operation in the disclosures for the reportable segment but should restate prior periods, beginning in the period in which the component is presented as a discontinued operation.
We believe that the failure of a disposal to meet the criteria to be presented as a discontinued operation would not be considered a change in an entity’s internal organization that causes the composition of its reportable segments to change. Accordingly, prior periods would not need to be restated.
Example 7-9
Company A has identified the following reportable segments: computer hardware, computer software, and customer service. Before year-end, A disposed of a portion of its computer hardware segment, and the disposal does not meet the criteria to be presented as a discontinued operation.
In preparing the current-year segment disclosures, A is not required to restate prior-period segment information to remove the portion of the computer hardware segment disposed of before year-end or to quantify the effect in the segment footnote.
7.13 Interim Disclosures
Entities that issue interim financial data, such as SEC registrants, should consider
the disclosure requirements in ASC 270. Specifically, ASC 270-10-45-11A states:
Effects of disposals of a component of an entity and unusual or infrequently
occurring transactions and events that are material with respect to the
operating results of the interim period shall be reported separately. Gains
or losses from disposal of a component of an entity and unusual or
infrequently occurring items shall not be prorated over the balance of the
fiscal year.
In addition, ASC 270-10-50-2 states, in part:
If interim financial data and disclosures are not separately reported for the
fourth quarter, users of the interim financial information often make
inferences about that quarter by subtracting data based on the third quarter
interim report from the annual results. In the absence of a separate fourth
quarter report or disclosure of the results (as outlined in the preceding
paragraph) for that quarter in the annual report, disposals of components of
an entity and unusual or infrequently occurring items recognized in the
fourth quarter, as well as the aggregate effect of year-end adjustments that
are material to the results of that quarter (see paragraphs 270-10-05-2 and
270-10-45-10) shall be disclosed in the annual report in a note to the
annual financial statements.