The Financial Accounting Standards Board (FASB) issued the Accounting Standards Update (ASU) 2014-08 to revise the treatment of discontinued operations. The update also obligates entities to issue further disclosures regarding disposal transactions that fail to meet the criteria of discontinued operations. It also makes alterations in the scope, presentation requirements, and presentation rules of the previous guidance. ASU 2014-08 was issued due to the shortcomings of the previous guidance, known as the Accounting Standards Codification (ASC) 205-20, which qualified too many disposal transactions as discontinued operations. Thus, the aim of the ASU was to offer information that was more useful in decision-making for the users, as well as raise the threshold for the qualification of disposal transactions as discontinued operations.
Before the introduction of the ASU, the previous guidance stipulated that three conditions had to be met by the results of operations of an entity’s component so as to be categorized as a discontinued operation. One of the conditions was that the component has either been disposed of or is classified as held for sale. The second condition was that the component’s cash flows and operations have been or will be removed from the entity’s ongoing operations because of the disposal transaction. The final condition was that the entity is not supposed to have any significant ongoing role in the component’s operations following the disposal transaction (Morris and Velanand 1). Under the new guidance, the second and third conditions have been eliminated.
The ASU expands the scope of the previous guidance to disposals of acquired businesses held for sale as well as equity method investments. It also expands the disclosure obligations for transactions that qualify as discontinued operations and requires entities to divulge information regarding individually significant components that are held for sale or disposed of, but which do not meet the specification of discontinued operations. Furthermore, it stipulates that entities should reclassify liabilities and assets of discontinued operation for every comparative period in the financial position statement (Morris and Velanand 1).
The ASU has made alterations to the scope of ASC 205-20. While investments in equity securities which were accounted for under the equity method were not within the scope of the previous guidance, there is no such exception under the ASU. Furthermore, the ASU stipulates that business or nonprofit activities that qualify under the category of held for sale after acquisition should be reported in discontinued operations. The new guidance also removed the ASC 360-10-15-5 scope exceptions regarding discontinued operations, but did not eliminate the exception for gas and oil properties which are accounted for under the full-cost method (Morris and Velanand 2).
The ASU has also made some changes to the recognition criteria. A discontinued operation is defined as an entity’s component that is categorized as held for sale or has been disposed of by sale, and that represents a strategic change which will have a noteworthy impact on the financial results and operations of an entity (Morris and Velanand 2). The ASU obligates entities to divulge the nature of any major continuing involvement such as financial guarantees, equity method investments, distribution and supply chain agreements, and options to repurchase assets that have already been disposed of. The ASU also amended the previous guidance by adding the held-for-sale criteria as well as the exceptions to the obligation to conclude the sale within one year (Morris and Velanand 3)
There are also alterations to the presentation. The new guidance requires the liabilities and assets of discontinued operations to be presented separately on the balance sheet’s face. Such requirements were nonexistent in the previous guidelines. Losses or gains from discontinued operations should also be presented either on the income statement’s face or in the financial statements’ notes. However, for those transactions that do not qualify as discontinued operations, losses and gains should be presented in income from continuing operations (Morris and Velanand 3).
There are also new disclosure requirements under the ASU. Entities must report key line items comprising the pretax loss or profit during the period of the discontinued operation in the income statement, including the cost of sales, interest expense, revenue, and amortization and depreciation. The update also stipulates that entities must reveal either the investing and operating cash flows, or capital expenditures, amortization and depreciation, and key investing and working noncash items associated with the discontinued operation. The pretax losses or profits of discontinued operations are presented in the income statement if they include a non-controlling interest (Morris and Velanand 5).
The new ASU guidance has led to several changes in the treatment for discontinued operations. The ASU has altered the scope, presentation, recognition criteria, and disclosure requirements of the previous guidance. The changes ensure that fewer disposal transactions qualify as discontinued operations and that users get information that is more useful in decision-making.
