In what can be seen as a cruel irony in the midst of the current financial crises, the Financial Accounting Standards Board has issued a proposed staff position - 144-d, Amending the Criteria for Reporting a Discontinued Operation.The proposal, issued as an exposure draft, redefines "discontinued operation" and matches a simultaneous proposal issued by the International Accounting Standards Board. The proposals also establish identical new disclosure requirements. The new definition would no longer include certain subsidiaries and asset groups.
"This project originated as part of the joint Financial Statement Presentation Project. FASB and IASB noted that the financial statement presentation project should result in a converged and improved presentation of discontinued operations," explained FASB fellow David Leverenz. "However, the boards acknowledged that there would be a lack of comparability until the definitions of a discontinued operation were converged."
So converge they did, and their proposals hit the streets just as companies in the U.S. and Europe began revaluing and re-assessing their operations in the wake of the malaise that hit Wall Street in late September.
For George L. Yungmann, senior vice president of financial standards at the National Association of Real Estate Investment Trusts, the change is beneficial for reasons more mundane than the global financial crisis. It's simply the burden of constantly reclassifying virtually every sold commercial property as a discontinued operation. That reporting, he said, is "completely dysfunctional ... because of the constant reclassification of operating results between continuing operations and discontinued operations."
"We think [the amendment] is a positive move," he said. "It will probably reduce the complexity that has been caused by the current FAS 144 guidance."
The proposed amendments would be effective, however, only for statements for fiscal years beginning after Dec. 15, 2009. Earlier application is permitted, but the standard would have to be applied retrospectively to all periods presented.
Under the current FASB Statement 144, a discontinued operation is a component that has been disposed of or classified as for sale provided that the operations and cash flows have been eliminated as a result of a disposal transaction, and that the entity will not have any significant involvement in the operations after the transaction.
International Financial Reporting Standard No. 5, on the other hand, holds that a component that has discontinued operations represents a separate major line of business or geographical area of operations, is part of a single coordinated plan to dispose of said business, or is a subsidiary acquired exclusively for resale.
Under the proposed definition, a discontinued operation is a component of an entity that is an operating segment (as defined in FASB Statement 131) and has either been disposed of or is classified for sale, or a business (as defined in FASB Statement 141) that meets the criteria to be classified as held for sale on acquisition. The same principle applies to not-for-profit organizations and activities.
A statement from the IASB noted that the proposed definition could result in fewer items being recognized in financial statements as discontinued operations. However, the additional disclosures, the statement said, would give information about components of an entity that have been disposed of or are held for sale but do not meet the definition of a discontinued operation.
FASB handed the project to its staff to accelerate the issuance of guidance after constituents asked them to expedite a statement.
The proposals apply to an operating segment that has either been disposed of or classified as held for sale, or a business or not-for-profit activity that is classified as held for sale on acquisition.
The change, if approved, would determine when a business component's income must be reported in the discontinued-operations section of an income statement.
The proposal also amends disclosure requirements for all components that have been disposed or put up for sale, regardless of whether they are reported in the income statement as discontinued operations or continuing operations. Under the new requirements, income tax expense or benefit does not have to be disclosed for components that are reported within continuing operations and that have been disposed of or classified as held for sale.
The exposure draft asks for comments on the definition of discontinued operations and requests suggested alternatives.
FASB's Leverenz said that the proposal is not part of any broader or ongoing project to amend Statement 144. "The scope of this proposed FSP is specific to only amending the definition of a discontinued operation and disclosure requirements," he said.
Comments are requested by Jan. 23, 2009.
The exposure draft is available at www.fasb.org.
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