Traditional business models in many sectors have been disrupted by the COVID-19 pandemic, geopolitical uncertainty, rising costs and falling consumer confidence. If your company is planning a major strategic shift this year, management may need to comply with the updated accounting rules for reporting discontinued operations that went into effect in 2015.
Discontinued operations typically don’t happen every year, so it’s important to review the basics before preparing your year-end financial statements.
Defining discontinued operations
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.
Examples of a qualifying major strategic shift include the 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 that includes a discontinued operation separately in the asset and liability sections of the balance sheet.
Disclosing the details
In addition, ASU 2014-08 calls for expanded 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.
The following disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:
- 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 noncash items of the discontinued operations, and
- Pretax profit or loss attributable to the parent if the discontinued operation includes a noncontrolling interest.
Management also must provide various disclosures and reconciliations of items held for sale for the period in which the discontinued operation is so classified and for all prior periods presented in the balance sheet. 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.
For more information
Major 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. Contact us to help ensure you’re complying with the updated guidance.