8.7 Discontinued Operations
8.7.1 EPS for Discontinued Operations
ASC 205-20 provides accounting and presentation guidance related to discontinued operations. According to ASC 260-10-45-3, an entity that reports a discontinued operation must present basic and diluted EPS for the discontinued-operations line item “either on the face of the income statement or in the notes to the financial statements.” This requirement is in addition to the requirement to present basic and diluted EPS for income (loss) from continuing operations and net income (loss). See Section 9.1.5 for additional discussion of how an entity should present and disclose EPS when it reports a discontinued operation.
8.7.1.1 Control Number for Diluted EPS
ASC 260-10
No Antidilution
45-20 The control number for determining whether including potential common shares in the diluted EPS computation would be antidilutive should be income from continuing operations (or a similar line item above net income if it appears on the income statement). As a result, if there is a loss from continuing operations, diluted EPS would be computed in the same manner as basic EPS is computed, even if an entity has net income after adjusting for a discontinued operation. Similarly, if an entity has income from continuing operations but its preferred dividend adjustment made in computing income available to common stockholders in accordance with paragraph 260-10-45-11 results in a loss from continuing operations available to common stockholders, diluted EPS would be computed in the same manner as basic EPS.
As noted in ASC 260-10-45-20, the control number in the calculation of diluted
EPS is income from continuing operations. Therefore, when an entity has a
discontinued operation, the income (loss) from discontinued operations, net
of tax, will be excluded from the determination of whether potential common
stock is dilutive in the calculation of diluted EPS. See Section 8.7.2.2 for
discussion of the control number when an entity with an NCI reports
discontinued operations. See also Section 4.1.2 for general discussion
of the concepts of antidilution and the control number.
8.7.2 NCI in Discontinued Operation
8.7.2.1 Income Statement Presentation
When an entity has an NCI in a discontinued operation, the amount of income
(loss) from discontinued operations, net of tax,
that is reported on the face of the income
statement includes amounts attributable to
the NCI in the discontinued operation in
accordance with ASC 205-20-45-3. Below
consolidated net income (loss), the entity
presents income (loss) attributable to NCI, net of
tax, which includes amounts attributable to
both income (loss) from continuing operations and
discontinued operations. These amounts are
deducted from consolidated net income (loss) to
arrive at net income (loss) attributable to the
parent. An entity must separately disclose income
(loss) from discontinued operations attributable
to the parent in accordance with ASC 810-10-50-1A.
Example 2 in ASC 810-10 includes an example illustrating the income statement an
entity may provide when it reports a discontinued
operation and has an NCI.
ASC 810-10
55-4J This consolidated statement of income illustrates the requirements in paragraph 810-10-50-1A that the amounts of consolidated net income and the net income attributable to Entity ABC and the noncontrolling interest be presented separately on the face of the consolidated income statement. It also illustrates the requirement in paragraph 810-10-50-1A(b) that the amounts of income from continuing operations and discontinued operations attributable to Entity ABC should be disclosed.
In this example, the NCI pertains to both continuing operations and discontinued
operations. The presentation would be similar if
the NCI pertained only to continuing operations or
only to discontinued operations.
8.7.2.2 EPS Accounting
Under ASC 260, the numerator in the calculation of EPS (i.e., income available
to common stockholders) excludes income
(loss) attributable to NCIs. Similarly, in the
calculation of basic and diluted EPS amounts
pertaining to a discontinued operation, the
numerator excludes income (loss)
attributable to NCIs. In other words, for both
calculations, the numerator is calculated on the
basis of income (loss) attributable to the parent,
net of tax. The control number for both
calculations will be income (loss) from continuing
operations, net of tax, attributable to the
parent. Thus, the control number in the
calculation of basic and diluted EPS for
discontinued operations excludes both (1)
income (loss) from continuing operations
attributable to NCI, net of tax, and (2) income
(loss) from discontinued operations, net of tax
(including amounts attributable to both the parent
and any NCI in the discontinued operation).
The example below illustrates the EPS accounting and presentation related to a
situation in which an entity reports a
discontinued operation and there is an NCI in the
discontinued operation. See Section
8.8 for additional discussion of the
calculation of basic and diluted EPS for
less-than-wholly-owned subsidiaries.
Example 8-19
NCI in a Discontinued Operation
Assume the following:
- Company T is a holding company that owns 85 percent of Company U and 75 percent of Company V.
- Company T’s operations consist solely of its investments in its consolidated subsidiaries U and V.
- Company T accounts for the 15 percent investment in U owned by third parties as an NCI.
- Company T accounts for the 25 percent investment in V owned by third parties as an NCI.
- In 20X1, T sells its 85 percent interest in U, which qualifies as a discontinued operation.
- Income from continuing operations for 20X1 is $2,500 before tax and $2,000 after tax. The NCI’s share of income from continuing operations, net of tax, for 20X1 is $500 (i.e., $2,000 × 25%).
- Income from discontinued operations for 20X1 is $400 after tax. The NCI’s share of income from discontinued operations, net of tax, for 20X1 is $60 (i.e., $400 × 15%).
- The weighted-average common shares outstanding during 20X1 are 2,000.
- The weighted-average potential common shares outstanding during 20X1 are 500.
Company T’s income statement presentation is as follows:
Company T’s calculation of basic and diluted EPS is as follows:
8.7.2.2.1 Preferred Stock Issued by Subsidiary That Represents a Discontinued Operation
Section 8.8.2.3 discusses the treatment of dividends on preferred stock issued by a subsidiary when the subsidiary is classified as a discontinued operation in the consolidated financial statements of its parent.