- Learn more about “discontinued operations” and their reporting rules.
- Find out how these rules define a “component” of a business and what qualifies as a “strategic shift” under the rules.
- Discover which disclosures you must make in these proceedings.
Marketplace changes during the COVID-19 crisis have caused many companies to make major strategic shifts in their operations. And they expect some of these changes will become permanent. In certain cases, these pivot strategies may need to be reported under the complex discontinued operations rules under U.S. Generally Accepted Accounting Principles. Fiducial has the information you need to know about navigating the rules of discontinued operations.
What does “discontinued operations” mean?
The scope of what’s reported as discontinued operations was narrowed by Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Since the updated guidance went into effect in 2015, the disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results.
A component comprises operations and cash flows that can be clearly distinguished from the rest of the company. This must be true both operationally and for financial reporting purposes. It could be a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group.
Examples of a qualifying strategic shift include three things. These are: disposal of a major geographic area, a line of business, or an equity method investment. When such a strategic shift occurs, a company must present, for each comparative period, the assets and liabilities of a disposal group. They must include a discontinued operation separately in the asset and liability sections of the balance sheet.
On the income statement, you should report the results of discontinued operations separately (net of income tax) from continuing operations. This must occur in both the current and comparative periods. Allocating costs between discontinued and continuing operations is often challenging. Why? Because a discontinued operation may only include direct costs.
What disclosures must you make in discontinued operations?
Additionally, under GAAP, companies must provide detailed disclosures when reporting discontinued operations. The goal is to show the financial effect of such a shift to the users of the entity’s financial statements — allowing them to better understand continuing operations.
You must make the following disclosures for the periods in which the operating results of the discontinued operation are presented in the income statement:
- The major classes of line items constituting the pretax profit or loss of the discontinued operation,
- Either 1) the total operating and investing cash flows of the discontinued operation, or 2) the depreciation, amortization, capital expenditures, and significant operating and investing non-cash items of the discontinued operation, and
- If the discontinued operation includes a non-controlling interest, the pretax profit or loss attributable to the parent.
Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation or if a disposal doesn’t qualify for discontinued operations reporting.
Today’s conditions — including shifts to work-from-home arrangements, domestic supply chains, and online distribution methods — have disrupted traditional business models in many sectors of the economy. These kinds of strategic changes don’t happen often, and in-house personnel may be unfamiliar with the latest guidance when preparing your company’s year-end financial statements. Need help navigating the rules of discontinued operations? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.