Companies that plan to sell or spin off part of their business should be aware of some recent changes in accounting standards for “discontinued operations” that are taking effect this year.

Beth Paul, a partner in the accounting services group in PricewaterhouseCoopers’ national office, is sounding a warning about the Financial Accounting Standards Board’s revised standard in Update No. 2014-08 for discontinued operations and the disclosure guidelines for disposals, particularly the implications for companies reporting disposals this year. In a recent blog post on LinkedIn about the revised criteria, she pointed out how companies will need to grapple with some subjective judgments and new disclosures.

“For calendar-year companies the new standard was effective January 1 for new transactions, so you don’t have to go back and assess the old ones, but for new transactions, it significantly raised the bar on what is a discontinued operation,” she told me. “It now requires that it be a strategic shift, which is not a defined term and is company specific. If you determine it’s a strategic shift, then it has to meet a second screen, which is it has to have a major impact. That’s also not defined, but the standard does give about five examples of what a major impact might be. They’re quite significant, with numbers in the range of 15 percent of total revenues or 20 percent of total assets. Because of this new bar, I think companies really need to think about when they’re selling something, is it really a discontinued operation?”

Paul pointed out that the old standard was in effect for a number of years, and accountants had grown accustomed to how to use it. “Now it’s time to reflect and say, ‘OK, I have a new transaction and does it really meet the definition based on this new bar of a strategic shift and major impact,’” she said. “I think that what some companies are finding, or at least what we’re seeing in consult, is that in fact transactions may not be meeting the new bar.”

The difference essentially revolves around whether an operation that has been discontinued can be considered truly strategic to a company. FASB had received some negative feedback on the old standard, indicating there were too many disposals, especially in the real estate industry. When a company would sell a building, each was considered a business and so the company would have to account for each building as a separate disposal. With the new standard, FASB was trying to strike the right balance.

“It may be in the past if you got rid of a couple of stores or you got rid of a product line, that might have been a discontinued operation,” Paul explained. “But today, to qualify as a strategic shift, it has to really be a major part of your business, like a major geography or a major line, or something along those lines. People are finding they have sold something, but it’s not meeting that first hurdle of a strategic shift, so they can’t report it as a discontinued operation, which then means the revenues and the expenses are just shown consolidated like they were previously, as opposed to when you get to ‘discop’ presentation, you have that one line item below continuing ops of the results of the discontinued operation, where you kind of collapse down all the revenue and expenses. They’re not meeting that threshold so they can’t show it that way.”

Even though the new way of presenting discontinued operations differs in some respects from the old method, companies may be able to highlight the numbers they want to communicate through disclosures in the Management Discussion and Analysis section of their financial reports or use non-GAAP measures, such as revenue excluding the items sold or cost of sales excluding the items sold.

While FASB’s primary objective for the new standard wasn’t to converge with International Financial Reporting Standards, Paul noted that the new standard does align many of the concepts and terminology with IFRS, so in that way it does enhance convergence.