Accounting Standards Update 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08) was issued by the Financial Accounting Standards Board (FASB) in April. Among other things, this standard creates a higher threshold for meeting the criteria for discontinued operations which is expected to result in fewer disposals, or classifications as held for sale, meeting the criteria of a discontinued operation.
In 2001, the FASB had broadened the definition of discontinued operations resulting in the inclusion of many small groups of assets that were recurring in nature. The inclusion of these disposals in discontinued operations resulted in excessive cost to preparers in preparing financial statements.
The project to modify the reporting of discontinued operations began in 2008, and as discussed in our prior article, the FASB had proposed a new standard in 2013. Most of the 2013 proposal remains intact with the issuance of this standard.
The changes in ASU 2014-08 are expected to reduce the number of disposals that qualify as discontinued operations. As a result, this will reduce the cost and complexity of preparing financial statements and make the financial statements more useful for decision making. In addition, the changes are expected to aid in the convergence of the treatment of discontinued operations for U.S. GAAP and International Financial Reporting Standards.
Definition – The higher threshold to meet the criteria of a discontinued operation is included in the definition through the requirement that a discontinued operation represent a "strategic shift that has (or will have) a major effect on an entity's operations and financial results." If a component of an entity meets the strategic shift criteria and 1) meets the criteria to be held for sale, 2) is disposed of by sale, or 3) disposed of by other than sale (i.e. spun-off or abandoned) then it is required to be presented as a discontinued operation.
A component of an entity includes operations and cash flows that can be clearly distinguished from the rest of the entity for operations and financial reporting. This may be a reportable segment, operating segment, reporting unit, subsidiary or asset group.
Scope Exceptions – All previous scope exceptions, except for oil and gas properties accounted for using the full cost method, have been removed. As a result of this change, a company may retain continuing involvement or cash flows from a disposal qualifying as discontinued operation. In addition, an equity method investment is eligible for treatment as a discontinued operation if it meets the criteria of the definition.
Disclosures – This standard expands the required disclosures for discontinued operations in many areas, including the inclusion of a reconciliation of major classes of assets or liabilities that are classified as held for sale, a reconciliation of major line items that are a part of pretax profit or loss (or net assets for a not-for-profit entity), as well as cash flow information about the discontinued operations.
The increase in disclosure includes information about the disposal of individually significant components of an entity that do not qualify for presentation as discontinued operations. Information about these disposals is required to be disclosed for prior periods presented for public business entities or not-for-profits that have conduit bond obligations that are traded, listed or quoted. Providing some disclosure relief for private companies, for all other entities the FASB required this disclosure only in the year of disposal, or in which the component was classified as held for sale.
The new standard will pose some challenges for companies evaluating discontinued operations. The determination of when to apply this guidance will require a significant use of judgment.
In particular, the FASB did not provide specific guidance on how to determine if a "strategic shift" has occurred, and therefore, there may be differences in interpretation of which disposals, or classifications as held for sale, represent strategic shifts. The examples provided in the standard include the disposal of a major line of business, a major geographical area, a major equity method investment or other major parts of an entity.
In addition, the definition includes the term "major effect" on the entity and the FASB did not clarify what constitutes a major effect on the operations or financial reporting of a company. Therefore, part of the consideration of whether a discontinued operation should be reported will be considering what is or is not "major" to the entity.
This standard is applied prospectively and may be early adopted for disposals (or classifications as held for sale) of a component that have not been reported in previous financial statements that have been made available for issuance. Otherwise, for public business entities and not-for-profit entities with conduit debt obligations that are listed, traded or quoted, the standard is effective for annual periods beginning after December 15, 2014 and interim periods within those years. For all other entities, the standard is effective for annual periods beginning after December 15, 2014 and interim periods beginning on or after December 15, 2015.
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