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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Please explain your consideration of whether the cessation of your [line of business] should be reported as a discontinued operation. Refer to ASC 205-20-45-1.
- 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.
- Please tell us how you determined it was not necessary to classify the assets and liabilities of [Component A] and [Component B] as held for sale as of [year-end]. Further, please tell us how you determined it was not necessary to reclassify the [Component A] and [Component B] results of operations as discontinued operations for the periods presented. Please refer to ASC 205-20-45.
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 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.
- 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.
- 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.
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We note that you have undertaken multiple restructuring initiatives during the periods presented. For each restructuring program, please revise your disclosures to include the facts and circumstances leading to the expected activity and the expected completion date. In addition, for each major type of cost associated with the activity, disclose, in total and by segment, the total amount expected to be incurred, the amount incurred in the period, and the cumulative amount incurred to date. See guidance in ASC 420-10-50-1.
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.
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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