ASU 2014-08 Changes the Way Discontinued Operations are Reported
Jason Emery, Managing Director, Audit Practice
Recently, the FASB issued Accounting Standards Update (ASU) 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. The amendments in the update change the requirements for reporting discontinued operations in Subtopic 205-20.
The Update was issued primarily to address financial statement users’ concerns that too many disposals of small groups of assets were reported as discontinued operations under Subtopic 205-20, resulting in confusing and less useful financial reporting to the users of the financial statements. The cost of making the required disclosures was also proving too burdensome for certain entities. The amendments in the Update address these issues by changing certain requirements for financial reporting.
Under current U.S. GAAP, many disposals of components which are routine and do not impact an entity’s strategy are reported as discontinued operations. A significant provision of ASU 2014-08 calls for reporting as discontinued operations only those disposals that represent a strategic shift or have a major impact on an entity’s financial results and operations. Examples include a disposal of a major geographical location, line of business, or other significant part of the entity, or disposal of a major equity method investment.
The amendment also impacts certain required disclosures for discontinued operations. If a discontinued operation is included in a disposal group, under ASU 2014-08 an entity must present, for each comparative period, the assets and liabilities of that disposal group separately in the statement of financial position. Other disclosures are required, including:
- Major classes of line items making up the pretax profit or loss (or change in net assets for a not-for-profit entity) of the discontinued operation.
- Either the total operating and investing cash flows of the discontinued operations or the depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation.
- If the discontinued operation includes a non-controlling interest, the pretax profit or loss (or change in net assets for a not-for-profit entity) attributable to the parent.
- A reconciliation of the major classes of assets and liabilities of the discontinued operation classified as held for sale that are disclosed in the notes to the financial statements to the total assets and liabilities of the disposal group. This is done for the initial period where the disposal group is classified as held for sale and all prior periods presented in the statement of financial position.
- A reconciliation of the major items of pretax profit or loss (or change in net assets for a not-for-profit entity) of the discontinued operation that are disclosed in the notes to the financial statements to the after-tax profit or loss of the discontinued operation presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
The Update also requires specified disclosures for disposals of individually significant components of an entity that do not qualify for discontinued operations presentation, and expands disclosures regarding an entity’s continuing involvement with a discontinued operation. The hope is that improving the definition and presentation will enable users of the financial statements to better understand the nature of disposal activities of the business and their impact.
Although the statement provides examples, it does not specify what constitutes ‘major’ and it does not provide guidance on how to determine whether a strategic shift has occurred. The new standard also allows a company to have continuing involvement in a disposed component, unlike rules under the previous pronouncement.
The amendments will be effective for public business entities, and not for profit entities that meet the definition of a public entity, for annual reporting periods beginning on or after December 15, 2014, and interim reporting periods within those years. For most nonpublic organizations, it will be effective for annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.
If you have any questions regarding ASU 2014-08, please contact Jason Emery at 1-800-244-7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.