What are discontinued operations?
Discontinued operations are a business, group of components, or nonprofit activity that has ceased operations. These activities are usually not profitable or in existence any longer, and their demise means that the company no longer exists. Contingent liabilities related to discontinued operations are also considered to be discontinued operations. However, there is no definitive definition of what constitutes a discontinued operation. In this article, we will cover the various aspects of the topic, including reporting discontinued operations on the income statement.
Accounting standards update (ASU) 2014-08
The new FASB standard on accounting for discontinued operations, referred to as ASU 2014-08, requires entities to separately present the assets and liabilities associated with discontinued operations on their balance sheets. The previous standard, ASC 205-20, did not require this presentation. This ASU requires that entities present the pre-tax earnings of the disposed component of an operating segment. As a result, the new standard has significant tax implications for companies.
The new standard simplifies the presentation of these types of items and makes it easier to understand. In addition to providing additional information to investors, ASU 2014-08 requires that businesses disclose all of the separately significant components of a business in the footnotes. In addition, it requires that the information be presented in a manner consistent with other similar financial statements. The new standard is effective immediately. But some companies may still find the new standard burdensome.
Accounting for discontinued operations
If you are looking for a new standard for identifying discontinued operations, then you have come to the right place. The Financial Accounting Standards Board (FASB) recently issued guidance on this topic. This new standard tightens the requirements for treating component disposals as discontinued operations and increases the disclosure requirements for such entities. In this article, we will look at how these new standards will impact your business. After all, your company’s future depends on it!
One of the most controversial aspects of this new standard is determining which operations qualify as discontinued. Many entities don’t have any reason to show something as a discontinued operation. It’s confusing to distinguish between continuing and discontinued operations. However, the new standard makes the process easier, and it provides for additional disclosures in footnotes. As a result, more disposals won’t be presented as discontinued operations. The new standard also eliminates the need for a separate line item for each discontinued operation.
Contingent liabilities related to discontinued operations
During a merger or acquisition, a company must account for contingent liabilities related to discontinued operations. For example, a company that plans to sell its pressurized container products will have to account for the gain or loss of the operations and any income tax payable on the sales. The company is required to report the amount of gain or loss from operations in the current year. Contingent liabilities related to discontinued operations are mostly benefits from future events.
Contingent liabilities related to discontinued operations are debts assumed by the buyer of a discontinued operation. These amounts are calculated by determining the net selling prices and carrying amounts of net assets, which are expected to be sold after the operation is sold. Financial statements must include separate line items for discontinued operations and detailed disclosures in the notes. In accordance with IAS 1 Presentation of Financial Statements, companies must include line-item disclosures of their liabilities related to discontinued operations.
Reporting discontinued operations on income statement
Reporting discontinued operations on the income statement is an important step in accounting. Often, companies undergo restructuring, which results in the disposal of product lines and equipment that no longer produce profit. The company also may sell different segments of its business, or it may shift its business model. In this case, the company must report discontinued operations separately from ongoing operations. In the United States, companies typically use GAAP to determine whether to report discontinued operations.
The rules for reporting discontinued operations are not complicated, but companies that experience major strategic shifts should review the basics. It’s important to note that these changes took effect in 2015 for most companies. Companies don’t need to reclassify discontinued operations every year, but it’s a good idea to revisit them before year-end financial statements are prepared. For example, a company may close a branch because its product is no longer selling or it is no longer profitable. In such cases, the business must report the profit generated by the sale.
Transition to new standard
The new standard will change the way companies report discontinued operations. Companies are permitted to transition to the new standard early, before the December 15th, 2016 effective date, and to do so on an interim basis within an annual reporting period. The company is currently evaluating how best to implement the new standard and the potential impact. It is aiming to make the process simpler, with less transactions. For more information, read the article. Until then, please consult the FAQs.
Under the old accounting standards, the sale of equity investments did not qualify as discontinued operations. ASU 2014-08 changes this, allowing the disposal of equity investments to be treated as a discontinued operation. The new standard requires that a company restate prior period financial statements to reflect the impact of the discontinued operation. The authors of this standard argue that this cumulative change will ease the burden on companies reporting discontinued operations. The new standard will not affect the amount of revenue a company makes, but it will require companies to disclose the impact of each discontinued operation.