The criteria for reporting a discontinued operation on financial statements was revised by the Financial Accounting Standards Board (FASB) on Thursday.
According to Accounting Standards Update 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, a discontinued operation is a disposal of part of an organization that has a major effect on its operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.
In addition, the revised guidance requires expanded disclosures that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.
It also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting, according to the FASB. This disclosure will provide users of financial statements with information about the ongoing trends in a reporting organization’s results from continuing operations.
FASB officials noted that the new rules represent a substantial change to current US Generally Accepted Accounting Principles (GAAP) requirements for a discontinued operation, which could include a reportable segment, operating segment, reporting unit, subsidiary, or an asset group.
Some stakeholders had relayed concerns to the FASB about the current US GAAP guidance, most notably that too many disposals of assets – including small groups of assets that are recurring in nature – qualified for discontinued operations presentation, according to FASB Chairman Russell Golden.
“By revising the criteria for reporting a discontinued operation, the board anticipates that the update will result in more decision-useful financial reporting for investors while eliminating an unnecessary source of cost and complexity for preparers,” he said in a written statement.
The new discontinued operation standard goes into effect in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, the guidance is effective for annual financial statements with fiscal years beginning on or after December 15, 2014.
The FASB also noted that the US GAAP guidance has a convergence tie-in with International Financial Reporting Standards (IFRS). Part of the new definition of a discontinued operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.