Selling part of your business? New rules for reporting disposals September 2014

In the loop
September 2014
Selling part of your business?
New rules for reporting disposals
What you need to know
-
-
New accounting guidance is
expected to reduce the number of
disposals that are separately
presented as “discontinued
operations” in the financial
statements.
The historical results of disposals
that are not discontinued
operations will not be evident on
the face of the financial statements,
in the segment footnote, or in the
five-year selected financial data
table.
-
Investors may want more
information about disposals to
provide transparency into a
company’s ongoing operating
results and to facilitate trend
analysis.
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The new rules are effective in 2015,
but can be adopted earlier and
applied to disposals in 2014.
Fewer disposals are expected to be reported as “discontinued
operations” under new guidance
The definition of a discontinued operation has changed significantly:
Companies planning to sell or spin-off part of their business should take note of
recent changes to the threshold for “discontinued operations” reporting. The
revised definition will require new judgment, and fewer disposals are expected to
meet the threshold. As a result of these changes, management should be prepared
for questions from stakeholders about disposals, especially those that do not
qualify for discontinued operations reporting.
“This [guidance]
addresses concerns
expressed by our
stakeholders that too
many disposals of
assets…qualify for
discontinued
operations
presentation”
— Russell Golden, FASB
chairman, April 10,
2014
Identifying discontinued operations requires new judgment
The new focus on “strategic shift” and “major effect” means the assessment of
whether a disposal is a discontinued operation will be company-specific and
require judgment. The guidance provides no specific definition of these terms
beyond their plain English meanings, but it includes some examples, such as the
disposal of a major geographical area of operations or a major line of business.
Unlike the old rules, the new guidance doesn’t specifically preclude discontinued
operations treatment when the company will continue to be involved with the
disposed-of component. However, continuing relationships could affect the
assessment of whether a strategic shift has occurred.
Operating results of disposals that qualify as discontinued operations will
continue to be shown separately from continuing operations on the face of the
financial statements for all periods presented. The guidance also includes
expanded disclosure and presentation requirements for discontinued operations,
including disclosures about the major financial statement line items comprising
pretax profit or loss of the component and cash flow information.
Will the new guidance leave investors wanting more?
Recognizing that fewer disposals will be presented as discontinued operations,
the guidance also requires new disclosures about significant disposals that don’t
meet the revised threshold. These requirements include disclosing pretax profit
or loss of the disposed-of component. Identifying which disposals are
“significant” and require disclosure is again subject to judgment.
Because the impact of these disposals will not be evident on the face of the
financial statements, some investors may be looking for more information about
their impact on ongoing operating results, beyond the required disclosures.
Management should be prepared for these questions, and may want to consider
whether and how to provide additional transparency, keeping in mind the
reporting requirements for any information that represents a “non-GAAP”
measure.
In the loop
How PwC can help
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To have a deeper discussion of how
the discontinued operations guidance
might affect your company,
please contact:
Dataline: Discontinued operations
More details and PwC’s observations on
the new discontinued operations guidance
Beth Paul
973 236 7270
[email protected]
For more accounting and financial
reporting developments, visit
www.cfodirect.com
Chad Kokenge
646 471 4684
[email protected]
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