8.2 Financial Statements and Other Affected Financial Information in Exchange Act Reports
When a component meets the criteria in ASC 205-20 for presentation as a
discontinued operation, the component’s results of operations must be
retrospectively reclassified to discontinued operations in the current period and
all prior periods presented when it first reports the discontinued operation.
MD&A and other affected financial information for prior periods should also be
updated to reflect the retrospective adjustment.
Registrants that present three years of financial statements may omit discussion of
the earliest year of changes in financial condition and results of operations if
such discussion was already included in any of the registrants’ prior EDGAR filings
that required such information. Registrants electing to omit such discussion must
disclose, in the current filing, the location of such discussion in the prior
filing. Registrants should consider the total mix of available information,
including the impact of any recastable events (e.g., a retrospective accounting
change such as a discontinued operation) on the prior-period MD&A, when
determining whether to omit discussion of the earliest year and the most appropriate
form of presentation. If a registrant concludes that it is necessary to discuss
operations related to the earliest period presented, it may limit the discussion to
the information that has changed or has been determined to be significant to its
operations or financial condition.
If a discontinued operation is first reported in interim financial statements in
a Form 10-Q, a registrant is not immediately required to retrospectively adjust the
annual financial statements presented in the most recent Form 10-K (annual pre-event
financial statements) to reflect the discontinued operation. A registrant is
generally not required to adjust the annual pre-event financial statements to
reflect the discontinued operation until they are comparatively presented with the
annual financial statements that report the discontinued operation (generally in the
registrant’s next Form 10-K). However, see Section
8.3
for circumstances in which this requirement may be accelerated.
In addition, SEC Regulation S-K, Item 302(a), requires that if a registrant reports a
material retrospective change (or changes), such as discontinued operations, for any
of the quarters within the two most recent fiscal years, the registrant must
disclose (1) an explanation for the material change(s) and (2) summarized financial
information reflecting such change(s) for the affected quarterly periods, including
the fourth quarter. Summarized financial information, which is required in a Form
10-K and certain registration statements, should include, at a minimum:
- Net sales or gross revenues.
- Gross profit (or costs and expenses related to net sales or gross revenues).
- Income (loss) from continuing operations.
- Net income (loss).
- Net income (loss) attributable to the entity.
- Earnings (loss) per share
Since this requirement only applies when there is a material
retrospective change, a registrant may not have provided such information in its
most recent Form 10-K. However, upon reporting a material discontinued operation, a
registrant would be required to include such disclosure in its next Form 10-K or
retrospectively revised financial statements filed in conjunction with certain
registration statements, as discussed below.
Example 8-1
Form 10-Q That First Reports a Component as a Discontinued Operation
Company A, an SEC registrant, determines that it has met the requirements for presenting Component B as a discontinued operation on March 1, 20X6. When A files its Form 10-Q for the quarter ended March 31, 20X6, it must retrospectively reclassify B’s results as a discontinued operation for the comparative interim period ended March 31, 20X5. Company A must also update MD&A for the interim period ended March 31, 20X5, to reflect the retrospective adjustments. However, there is no immediate requirement for A to retrospectively reclassify B’s results as a discontinued operation for the annual financial statements presented in its Form 10-K for the year ended December 31, 20X5.
Further, Question 2 of SAB Topic 5.Z.5 provides interpretive
guidance on disclosures that the staff would expect “regarding discontinued
operations prior to the disposal date and with respect to risks retained subsequent
to the disposal date.” Question 2 further states:
MD&A
[footnote omitted] 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 . . . [footnote omitted] 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.
Similarly, for dispositions that do not qualify as discontinued
operations, certain disclosures within the Exchange Act reports must be provided
outside the financial statements. SEC Regulation S-K, Item 303, and paragraph 9220.2 of the
SEC’s Financial Reporting Manual (FRM) require registrants to describe in MD&A
any unusual or infrequent events or transactions that materially affected the amount
of reported income from continuing operations and, in each case, indicate the extent
to which income was affected. Such a description would include any material disposal
transactions for the periods covered, even if those transactions did not meet the
discontinued-operations criteria in ASC 205-20.