The Financial Accounting Standards Board has issued new guidance on representing when a company or organization discontinues its operations.
Accounting Standards Update No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, changes the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.
“This update addresses concerns expressed by our stakeholders that too many disposals of assets—including small groups of assets that are recurring in nature—qualify for discontinued operations presentation,” said FASB chairman Russell G. Golden in a statement. “By revising the criteria for reporting a discontinued operation, the board anticipates that the update will result in more decision-useful financial reporting for investors while eliminating an unnecessary source of cost and complexity for preparers.”
Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.
In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.
The new guidance also requires disclosure 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 amendments in the update will enhance convergence between U.S. GAAP and International Financial Reporting Standards, according to FASB. Part of the new definition of discontinued operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.
The new standard is effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is effective for annual financial statements with fiscal years beginning on or after Dec. 15, 2014.
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