Handbook: Discontinued operations & HFS disposal groups

The IFRS Foundation is a not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards. In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues. This is the profit made, if any, in the accounting period in which the operation was discontinued. Secondly, the component needs to be identifiable as a separate business that is being removed from operation intentionally or a subsidiary of a component being held with the intent of sale in the near future. A business division can be discontinued because of a wide variety of reasons, such as closing a division that cannot turn or consistently sustain a profit or a redundant division following a merger. To allow for equitable access to all users, SEC reserves the right to limit requests originating from undeclared automated tools.

Companies often cancel product lines, dispose of equipment, sell market segments, and shift their business models. All of these structural changes result in discontinued product lines, profit centers, or business units. Discontinued operations are treated slightly differently under the Generally Accepted Accounting Principles (GAAP). Similarly to IFRS, a company is allowed to report discontinued operations under GAAP when two criteria are met.

The impacts relating to measurement of assets and liabilities (e.g. additional catch-up depreciation) are included in current year P/L of continuing operations (IFRS 5.28). January 2016 IFRIC update discusses presentation of intragroup transactions between continuing and discontinued operations. IFRIC did not issue any interpretation, but it noted that IFRS 5 cannot override consolidation requirements of IFRS 10, therefore Approach #2 from the example above should be adopted. Entities may want to provide additional information in the notes that would highlight the impact of intragroup transactions between continuing and discontinued operations. Component of an entity is defined as operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity (IFRS 5.Appendix A). Paragraph IFRS 5.31 further clarifies that a component of an entity will have been a CGU while being held for use or a separate subsidiary (IFRS 5.36A).

As with GAAP, discontinued operations are reported in a special section of the income statement. The company should also provide a detailed description of the nature of the discontinued operations, the date of disposal, and the gain or loss from the disposal of assets in the notes to the financial statements. The gains or losses from a non-recurring event are recognized separately on the company’s income statement below the performance of its core operations so that investors can easily distinguish between continuing vs. discontinued operations. The net income or loss from discontinued operations can significantly impact a company’s overall financial performance in current and prior periods and should be carefully evaluated by investors and analysts.

Firstly, the asset or business component in question needs to be already disposed of or reported as being held for sale. Discontinued operations are the results of operations of a component of an entity that is either being held for sale or which has already been disposed of. The designated results of operations must be reported as a discontinued operation within the financial statements if both of the conditions noted below are present. This allocation assumes a uniform ratio of consolidated debt to equity for all operations (unless the assets to be sold are atypical — for example, a finance company — in which case a normal debt to equity ratio for that type of business may be used). If allocation based on net assets would not provide meaningful results, then the reporting entity should allocate interest to the discontinued operations based on debt that can be identified as specifically attributed to those operations. So as not to confuse adjustments to the financial statements that relate to previously reported discontinued operations, a company may classify the adjustments separately in the discontinued operations section of its financials.

Specific Identification Method: A Detailed Guide

Marketplace changes during the COVID-19 crisis have caused many companies to make major strategic shifts in their operations — and some changes are expected to be permanent. In certain cases, these pivot strategies may need to be reported under the complex Discontinued Operations rules under U.S. This Handbook provides an in-depth look at the classification of operations that have been or will be disposed of. We have organized our discussion so that each step in the classification process is analyzed to make it easier to identify how a disposal should ultimately be presented and disclosed; for areas where the guidance is unclear, we have provided our position. We hope that this publication will be useful in properly reporting discontinued operations.

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. A component comprises operations and cash flows that can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the company. It could be a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group. The issue of taxation with regards to discontinued operations can be rather complex. Discontinued operations often still make a gain or a loss in the accounting period in which it decided to cease operations. Under the International Financial Reporting Standards (IFRS), discontinued operations are reported when they meet two criteria.

For many companies, a significant line item on the balance sheet is accounts receivable. But can you take the amount reported at face value, or could there be more to the story? The International Public Sector Accounting Standards Board® (IPSASB®) has issued International Public Sector Accounting Standard® (IPSAS®) 44, Non-current Assets Held for Sale and Discontinued Operations. For best practices on efficiently downloading information from SEC.gov, including the latest EDGAR filings, visit sec.gov/developer.

About the IFRS Foundation

The disadvantage is that some intragroup transactions are not eliminated on consolidation as required by IFRS 10. The number of companies reporting discontinued operations jumped significantly, however, with the adoption of SFAS 144 in 2002, to 589—a 95% increase—and has remained at a higher level. Although the ratio of companies reporting gains versus losses has not changed significantly since 2002, the percentage of all companies reporting discontinued operations doubled to 12%. 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. The FASB narrowed the types of disposals that are reported in discontinued operations to exclude from the presentation requirement routine transactions that do not change the entity’s strategy.

There will still be the same income and expenses as per the first scenario, but there will also be charges related to the physical transfer of some of the channel’s equipment to the new location, as per the agreement he has in place with the buyer. These costs will also be reflected under “Discontinued Operations” on the next income statement. Secondly, the discontinued operation is not allowed to have significant continued involvement with the parent company, which is significantly different from IFRS. Another difference is that equity method investments are not allowed to be classified as being held for sale. The discontinued operations represent unnecessary segments that a company divests or shuts down to dispose of at a later date. The Discontinued Operations line item on the income statement represents the parts of a company that were either divested or shut down (i.e. classified as held-for-sale).

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It ensures external reviewers do not confuse the company’s profitability due to misinterpretation. As a result, only transactions with external parties of X are presented as a discontinued operation. The disadvantage of this approach is that it does not faithfully present results of both operations. In our example, it seems as if X is a loss making subsidiary, which obviously is not true. At the same time, the profitability of the rest of group A is overstated, because it does not take into account contribution made by X in earning the revenue. This helps creditors and investors what is reoccurring and what activities will end.

Continuing involvement implies the ability to influence the operating or financial policies of the disposed component. If the discontinued operation resulted in a gain, the company might be subject to taxes on that gain and its accounting purposes. If the discontinued operation resulted in a loss, the company might be able to claim a tax deduction for that loss as contingent liabilities. Discontinued operations can be calculated by taking the operations and cash flows of a shut-down segment of the business and subtracting them from the company’s overall financial results in the near future. Once divested, the continuing involvement is stopped, and the discontinued business division or company asset is sold off.

History of IFRS 5

We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. In closing, the net income of our hypothetical company after the disposal is $18.2 million. However, let’s say that the company decided to divest an underperforming segment because it was unprofitable and weighing down its margins. The following are common reasons for a company to divest or terminate a business division. IFRS 5 was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005.

You can also sign up for email updates on the SEC open data program, including best practices that make it more efficient to download data, and SEC.gov enhancements that may impact scripted downloading processes. In March 2004 the Board issued IFRS 5 Non‑current Assets Held for Sale and Discontinued Operations to replace IAS 35. In April 2001 the International Accounting Standards Board (Board) adopted IAS 35 Discontinuing Operations, which had originally been issued by the International Accounting Standards Committee in June 1998.

Let’s discuss two approaches to presentation of consolidated P/L with subsidiary X presented as a discontinued operation. The CPA Journal is a publication of the New York State Society of CPAs, and is internationally recognized as an outstanding, technical-refereed publication for accounting practitioners, educators, and other financial professionals all over the globe. Edited by CPAs for CPAs, it aims to provide accounting and other financial professionals with the information and analysis they need to succeed in today’s business environment. The telephone industry has advanced greatly over the years, and the company has experienced a major decline in sales as well as deteriorating profit margins within the Rotary Phone Business Unit.

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. All of the changes described above will lead to discontinuation, and therefore must be reported as discontinued operations on financial statements. Presentation of Discontinued Operations
The transaction that qualifies as discontinued operations require detailed disclosures for the periods in which the operating results of the discontinued operation are represented in the income statement. For example, companies must disclose the major line items (such as revenue, cost of sales, depreciation and amortization, and interest expense) consisting of the profit or loss before tax of the discontinued operation.

Company

However those differences were not addressed in the short-term IASB-FASB convergence project. Discontinued operations refer to discontinuing product lines deemed obsolete or no longer profitable in an accounting period. The disposition of equipment has reached the end of its useful life, the sale of various market segments, and changes in business models.

Additionally, net cash flows attributable to the operating, investing and financing activities of discontinued operations should also be disclosed (IFRS 5.33(c)). Under GAAP, companies also must provide detailed 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 reporting of discontinued operations signals that, through a disposal transaction, an entity is undertaking a strategic shift of significance to its operations and financial results. It shows the financial effect of such a shift to the users of the entity’s financial statements – allowing them to better understand continuing operations.

• For many companies, a significant line item on the balance sheet is accounts receivable.
• Although the ratio of companies reporting gains versus losses has not changed significantly since 2002, the percentage of all companies reporting discontinued operations doubled to 12%.
• 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 CPA Journal is a publication of the New York State Society of CPAs, and is internationally recognized as an outstanding, technical-refereed publication for accounting practitioners, educators, and other financial professionals all over the globe.

The current definition of discontinued operations reduces the burden on preparers, but disclosures remain extensive – in particular for significant disposals that do not qualify as discontinued operations. Under IFRS, discontinued operations refer to meeting certain criteria to be reported separately in financial statements. Exhibit 3 presents the percentage of companies (by industry) reporting discontinued operations in the pre- and post-SFAS 144 periods. In nearly every industry segment, the percentage of companies reporting discontinued operations doubled after the passage of SFAS 144.

• Discontinued operations are specific product lines or parts of a business that have been terminated and are no longer in use.
• The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
• Adjustments may occur because of benefit plan obligations, contingent liabilities, or contingent contract terms.
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• Paragraph IFRS 5.31 further clarifies that a component of an entity will have been a CGU while being held for use or a separate subsidiary (IFRS 5.36A).

This standardization makes it much easier for business owners, investors and government agencies to understand financial statements. This means that any income or expenses related to the channel’s operation will now fall under “Discontinued Operations” on the income statement (the one that will be generated for the same quarter he sold the station in). In Ned’s case, these amounts include sale revenues from ads, the cost of the severance packages, taxes, licensing fees, programming charges, interest expenses, etc. But in either case, the discontinued operations are reported separately from a company’s core, recurring operations. When a company conducts a partial or complete sale of a business segment, it is classified as discontinued operations. As more and more unusual items are classified as part of income from continuing operations, the ability for managers to opportunistically classify items and smooth earnings will be reduced.