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Reporting Discontinued Operations

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Financial statements usually focus on the results of continuing operations, but many times, organizations sell a product line, asset group or another component. Such disposal should be reported as a discontinued operation under U.S. GAAP (Generally Accepted Accounting Principles) in certain specified situations.

Every business component comprises operations and cash flows that can be clearly distinguished from the rest of the company; such components can be a re portable segment or an operating segment, a reporting unit, a subsidiary or an asset.

Under current guidance, two requirements were required for a transaction to be arranged as discontinued operations:

  1. The component had been disposed of or arranged as “held for sale.”
    ASC 205-20-45 component or a group of elements of an entity, business or nonprofit activity (the entity to be sold) shall be arranged for sale in the period in which all the following criteria are met:
  • Management has the authority to approve the action and perform a plan to sell the entity to be sold
  • The entity to be sold is accessible for immediate sale in its present condition, subject only to the usual and familiar terms for selling such entities.
  • An active arrangement to locate a buyer and other actions required to complete the plan to sell have been commenced.
  • The sale of the entity to be sold is predictable. The entity’s transfer to be sold is expected to qualify for recognition as a completed sale within one year, with several exceptions.
  • The entity to be sold is being diligently promoted for sale at a reasonable price with its current fair value.
  • Actions required to fulfil the plan to sell clearly specify that it is unlikely that essential changes to the scheme will be made or that the scheme will be withdrawn.
  1. Disposal represents a “strategic shift”
    ASC 205-20-55 even furnish a few examples of disposals that certified as strategic shifts that result in a major effect on your operations, financial outcome, or both:
  • A major geographical area.
  • A major line of business.
  • A major equity method investment.
  • Other major parts of an entity

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.

Income Statement

Income from continuing operations before income taxes xxx
Income taxes xxx
Income from continuing operations xxx
Discontinued operations
Loss from operations of discontinued business component xxx
Income tax benefit xxx
Loss on discontinued operations xxx
Net income xxx

Cash flow statements
Companies must also show either:

  • Total of operating and investing cash flows from the discontinued operation, or
  • Depreciation, amortization, capital expenditures, and significant operating and investing noncash element of the discontinued operation.

If the discontinued operation includes a non-controlling interest, the company must provide the pretax profit or loss attributable to the parent.

Management must also provide various disclosures and reconciliation of items held for sale of the period in which the discontinued operation is classified and for all prior periods furnished in the statement of financial position. Additional reveals may be required if the company plans significant continuing involvement with a discontinued operation.

At AJSH, we assist our clients in bookkeeping, payroll, auditing, secretarial compliances, and preparation of financial statements ensuring compliance with applicable accounting standards. If you have any questions or wish to know more about discontinued operations, kindly contact us.

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