2.5 Discontinued Operations, Assets Held for Sale, and Restructuring Charges
2.5.1 Discontinued Operations and Assets Held for Sale
Examples of SEC Comments
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We note the classification of the assets and liabilities of [Business Unit A, Business Unit B, and Business Unit C] as held for sale in your year-end and interim period financial statements. Explain to us why you did not separately report the results of operations of the discontinued operations on your income statement in accordance with ASC 205-20-45-3. Please provide us your comprehensive analysis of the applicable accounting literature as part of your response.
- Please provide us your analysis of how you determined that your disposal qualified as a strategic shift, as outlined in ASC 205-20-45-1B and 1C, in support of your discontinued operations accounting. Please identify and evaluate all relevant facts and circumstances. As part of your analysis, describe how you determined your [Business Unit A] to be important to your operations and strategy, and a major part of your entity.
- We note your conclusion that the disposition of [Component A] did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect [on] your operations and financial results. Please clarify to us your basis for this conclusion given that this property was the only property in [Segment B] in [year 2] and [year 1] and that revenues from this segment were 39% and 43% of total revenues in [year 2] and [year 1], respectively.
Under ASC 205-20-45-1B, a disposal should be presented as a discontinued
operation if it “represents a strategic shift that has (or will have) a major effect on an
entity’s operations and financial results.” ASC 205-20 does not define the terms
“strategic shift” or “major.” Therefore, the determination of whether a disposal qualifies
for discontinued-operations reporting requires (1) an assessment of both qualitative and
quantitative factors and (2) the use of judgment. Accordingly, the SEC staff has asked
registrants to provide more information about how they concluded that a disposal either
did or did not qualify for discontinued-operations presentation.
The staff has also asked registrants to discuss whether assets met the
held-for-sale criteria in ASC 360 and to explain how they considered the related
required disclosures. The staff may inquire about items such as:
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The timeline of events leading to the sale.
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The company’s consideration of the factors used to determine whether assets qualify for classification as held for sale, especially, when assets have been classified as held for sale for an extended period or when assets are not classified as held for sale at the end of a reporting period but are sold shortly thereafter.
In addition, the SEC staff has commented when a registrant that presented income or loss from
discontinued operations failed to provide disclosures about discontinued operations as required under
ASC 205-20-50.
The SEC staff may ask questions about the timing of impairment testing when assets are classified as held for sale or are disposed of. For example, the staff may ask whether assets that the registrant expects to sell or dispose of were tested for impairment in prior periods. See Sections 2.11 and 3.1 for further discussion of long-lived-asset impairment testing and early-warning disclosures, respectively.
2.5.2 Restructuring Charges
Examples of SEC Comments
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We note your disclosures regarding [Restructuring Plan]. Please expand your note disclosure regarding the restructuring actions to provide the expected completion date, the total amount expected to be incurred for each major type of cost associated with the activity, and the required segment disclosures as applicable. Refer to ASC 420-10-50-1 and SAB Topic 5.P.4, or tell us why you believe these disclosures are not required. Additionally, tell us your consideration for disclosure of your expected cash requirements in the discussion of your liquidity and capital resources. Refer to Item 303(b)(1) of Regulation S-K.
- We note your disclosure that . . . “as part of the [year 1] global strategic plan [you] discontinued certain product categories which resulted in inventory write-downs. . . of approximately $[X] million.” Please be advised that inventory markdowns should be classified in the income statement as a component of costs of goods sold. We refer you to ASC 420-10-S99-3.
- We note that you have recognized restructuring-related and other charges of $[X] million for fiscal year [3], $[Y] million for fiscal year [2], and $[Z] million for fiscal year [1], representing [A]%, [B]% and [C]% of operating income, respectively. Please tell us why you have not provided your accounting policy for recognizing restructuring charges and the disclosures required by ASC 420-10-50-1 and also SAB Topic 5:P.4 in your footnote and MD&A disclosures.
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We note your disclosure that . . . you identified annual reductions in [selling, general, and administrative expense (SG&A)] in the amount of $[X] to $[Y] million. Please also provide the footnote disclosures required by ASC 420-10-50 related to your restructuring activities.
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You incurred $[X] million of [restructuring] costs compared to your pre-tax income of $[Y] million for the [six-month period]. The only disclosures provided related to these costs appear to be that they were incurred to support the transformation of the . . . business. We also note that you exclude these costs from your determination of Adjusted EBITDA. Please provide the disclosures required by ASC 420-10-50 and SAB Topic 5:P.4 related to these [restructuring] costs. Please ensure your disclosures specifically address the nature of these costs including the transformation that you are referring to and whether you expect to incur additional costs related to this transformation.
The SEC staff has inquired about registrants’ disclosures related to corporate reorganizations and restructurings, workforce reductions, and facility closures. In accordance with ASC 420-10-50-1, registrants should disclose specific information in “notes to financial statements that include the period in which an exit or disposal activity is initiated and any subsequent period until the activity is completed.” Such information would include a description of the exit or disposal activity, its expected completion date, where in the income statement the amounts are presented, and quantitative information about each major type of cost associated with the activity and about each reportable segment. Further, in accordance with ASC 420-10-50-1(e), when a liability for a cost associated with the activity is not recognized because fair value cannot be reasonably estimated, registrants should disclose that fact and the reasons why.
In addition, ASC 420-10-S99-3 states, in part:
The SEC staff recognizes that there may
be circumstances in which it can be asserted that inventory markdowns are costs directly
attributable to a decision to exit or restructure an activity. However, the staff
believes that it is difficult to distinguish inventory markdowns attributable to a
decision to exit or restructure an activity from inventory markdowns attributable to
external market factors that are independent of a decision to exit or restructure an
activity. Further, the staff believes that decisions about the timing, method, and
pricing of dispositions of inventory generally are considered to be normal, recurring
activities integral to the management of the ongoing business. Accordingly, the SEC
staff believes that inventory markdowns should be classified in the income statement as
a component of cost of goods sold.
The SEC staff has asked registrants to correct the classification and present the
write-down of inventory in cost of goods sold when it has observed inventory markdowns
presented in a restructuring line item on the face of the income statement.
The SEC staff has also challenged the consistency of registrants’ disclosures within MD&A and other filings, and it has directed registrants to comply with the guidance in SAB Topic 5.P.4 on disclosures related to material restructuring activities.
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