FASB Simplifies Discontinued Operations
A new FASB accounting standard to take effect in 2015 will eliminate from U.S. Generally Accepted Accounting Principles (GAAP) the complex implementation guidance for discontinued operations and in its place substitute a new, easier to understand principle.
Under that principle, only disposals of businesses that represent strategic shifts that have a major effect on an organization’s operations and financial results will be reported in discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.
A discontinued operation can be broadly described as a business—or a component of a business—that the organization has already discontinued or plans to discontinue.A discontinued operation can be broadly described as a business—or a component of a business—that the organization has already discontinued or plans to discontinue.
Under the new standard, investors, lenders and other users of financial statements will benefit from expanded disclosures that will provide more information about the assets, liabilities, income, and expenses of discontinued operations.
The new guidance will also require disclosures of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations.
The FASB issued the new standard on April 10.
organizations can take advantage of the new guidance by adopting it earlier (even if it is before December 15, 2014) for any newly planned disposals of discontinued operationsFor public companies with calendar year ends, the new standard becomes effective in the first quarter of 2015. For most private companies and not-for-profit organizations, it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014. However, organizations can take advantage of the new guidance by adopting it earlier (even if it is before December 15, 2014) for any newly planned disposals of discontinued operations.
The amendments to the definition of a discontinued operation are similar to the definition contained in IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, which indicates that a discontinued operation should represent a separate major line of business or geographical area of operations.
Unlike IFRS 5, however, the new guidance includes principle for reporting discontinued operations based on the notion of a major strategic shift, and several illustrations that provide further guidance on how to interpret that principle in specific examples.
Finally, the amendments in this Update require certain disclosures in the notes to financial statements for individually significant components of an organization that do not qualify for discontinued operations reporting. Those disclosures are not required under IFRS 5.
The standard was a result of stakeholders informing the FASB that too many disposals qualify for discontinued operations presentationThe standard was a result of stakeholders informing the FASB that too many disposals qualify for discontinued operations presentation, including routine disposals of small groups of assets. For example, under existing GAAP, a discontinued operation may include a reportable segment, operating segment, reporting unit, subsidiary, or an asset group.
Many also expressed concern that that the extensive implementation guidance and illustrations on applying the current definition of discontinued operations can be complex and difficult to apply. Others have criticized the limited information about discontinued operations because existing disclosures are primarily focused on the income statement.
Discontinued operations is also an issue the FASB addressed as it kicks off its simplification initiative (mentioned in the last issue) to reduce complexity in accounting rules.
For more details on the new standard, you can read the FASB in Focus and watch a video featuring FASB member Tom Linsmeier and project manager Phil Hood.