3.3 Presentation of Discontinued Operations

During deliberations of the guidance in ASU 2014-08, some Board members noted that disclosure of investing and operating cash flows is more meaningful than disclosure of depreciation and amortization, capital expenditures, and significant noncash items. However, the cash flow disclosures could present a significant challenge for entities that have a centralized cash management process (since these entities do not typically segregate their invoices or purchase orders at the business unit or operating unit level) and may be difficult to provide in a timely manner and without undue effort. Therefore, the Board decided to give entities the option of providing the above alternative disclosure in the notes to the financial statements. The Board also decided not to require entities to disclose the financing cash flows of a discontinued operation because financing transactions are often conducted at the parent level rather than within each subsidiary.

Before the adoption of ASU 2014-08, entities were not required to separately disclose — in the statement of cash flows or in the notes to the financial statements — cash flows pertaining to discontinued operations reflected in operating, investing, and financing activities. However, in his 2005 AICPA Conference speech, Mr. Levine stated that if an entity chooses to separately present cash flows pertaining to discontinued operations in the statement of cash flows, such presentation should be in line with the basic principle of ASC 230 (i.e., all cash flows must be reported as operating, investing, or financing activities, as applicable). Therefore, although they are not required to do so, some entities have chosen to separately present the cash flows pertaining to discontinued operations on the face of the cash flow statement or to disclose such information in the notes to the financial statements, classifying cash flows pertaining to discontinued operations within operating, investing, and financing activities.

Under ASU 2014-08, if an entity chooses to separately disclose cash flows pertaining to discontinued operations in the notes to the financial statements, the entity is only required to provide the minimum disclosures described in ASC 205-20-50-5B(c), including either (1) total operating and investing cash flows of the discontinued operation or (2) depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation.

However, ASU 2014-08 states that “[a]n 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.” From this wording, it is not clear whether, (1) if an entity elects to provide these minimum disclosures on the face of the statement of cash flows (in particular the option to only disclose depreciation, amortization, capital expenditures, and significant operating and investing noncash items), such disclosures would represent the required minimum cash flow information about the discontinued operation to present in the statement of cash flows or (2) an entity would nonetheless be required to comply with the principles of ASC 230 and provide total operating, investing, and financing information for the discontinued operation to the extent applicable. On the basis of informal discussions with the FASB staff, we do not believe that ASU 2014-08 amended the principles of ASC 230, specifically those related to providing total operating and investing cash flows for a discontinued operation. We therefore believe that if an entity elects to provide the ASU 2014-08 cash flow disclosures pertaining to a discontinued operation on the face of the statement of cash flows, the entity would need to comply with the principles of ASC 230. Given the lack of clarity discussed above, entities are encouraged to consult with their accounting advisers if they are considering an alternative presentation of cash flows related to discontinued operations on the face of the cash flow statement.

When using this presentation, preparers should be aware that the approach does not provide a total for each of the three categories (although a user could compute these totals by adding the net cash flow for continuing operations and discontinued operations for each category). Accordingly, when using this alternative approach, captions related to any totals presented must clearly reflect the category to which the total is related (continuing vs. discontinued).

Entities should provide separate disclosures consistently for cash flows pertaining to discontinued operations for all periods affected and should continue to do so until there are no longer material cash flows related to the discontinued operation. In addition, ASU 2014-08 requires entities that have significant continuing involvement with a discontinued operation after the disposal date to disclose the amount of any cash inflows or outflows to or from the discontinued operation and any revenues and expenses with the discontinued operation presented in continuing operations after the disposal transaction that were eliminated in the consolidated financial statements before the disposal. SEC registrants should also consider discussing in MD&A the impact of the discontinued operations on future cash flows.

The proceeds from the sale of discontinued operations should be presented as cash associated with investing activities of discontinued operations. Although neither ASC 230 nor ASC 360-10 provides explicit guidance on the presentation of proceeds from the sale of discontinued operations in the statement of cash flows, this presentation is consistent with the concepts in those standards.

ASC 230-10-10-1 states that “[t]he primary objective of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an entity during a period.” Some preparers have included the proceeds from the sale of a discontinued operation in cash flows from continuing operations since these proceeds will be used to fund outflows of continuing operations. However, in commenting on the proper classification of insurance proceeds in the statement of cash flows at the 2005 AICPA Conference, Mr. Levine clarified that the SEC staff does not believe that the classification should be affected by how an entity intends to spend such proceeds. Further, the SEC staff’s view is consistent with ASC 230-10-45-21B, under which entities are required to classify proceeds from insurance settlements on the basis of the underlying loss (see Section 6.3.2 for additional information). This view would also apply to reporting the proceeds from the sale of a discontinued operation.

Although ASC 360-10 does not provide explicit guidance on the presentation of discontinued operations in the statement of cash flows, ASC 205-20-45-3A and 45-3B require that gains or losses from discontinued operations be presented separately from gains or losses from continuing operations in the income statement. Likewise, in the statement of cash flows, proceeds from the sale of assets that are associated with discontinued operations should be presented separately as cash related to investing activities of discontinued operations.

However, the allocation of taxes associated with the sale of a discontinued operation to investing activities would not be appropriate. ASC 230-10-45-17(c) requires that cash flows associated with cash payments to governments for taxes be included as a component of operating cash flows. Further, in the background information in paragraph 92 of FASB Statement 95, the Board indicates the following:

On the basis of this wording and the guidance in ASC 230-10-45-17(c), the Board decided not to permit the allocation of income taxes to the various cash flow components.