Key Considerations
In the ever-changing world we live in, often times, business find themselves being spread thin, sharing attention, time and resources among multiple divisions or business segments, and not exceling at any of them. Because of this, companies may choose to undergo strategic changes, such as selling or discontinuing a specific segment or division of the operations. These strategic decisions are not made lightly, and can have a major impact on the operational dynamics of a company. As with most things, these decisions may also trigger specific accounting treatment, when the company issues financial statements in accordance with U.S. GAAP. Discontinued operations accounting is a complex area of GAAP that demands attention and meticulous handling.
Let’s delve into the key considerations surrounding discontinued operations accounting under U.S. GAAP.
Definition of Discontinued Operations:
According to U.S. GAAP, a discontinued operation refers to a component of an entity that has been disposed of or is classified as held for sale. A component of an entity can be an operating segment, a reportable segment, a subsidiary, or an asset group.
Criteria for Classification:
To be classified as a discontinued operation, a disposal or sale must first be determined to represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, Once determined, the operations must meet other specific criteria outlined in Accounting Standards Codification (ASC) 205-20. These criteria typically include:
Measurement and Reporting:
Once a component is classified as discontinued, it needs to be measured and reported separately in the financial statements. Here are some key points:
Disclosures:
Users of GAAP financial statements know that disclosure is paramount to the usability of the Company’s financial statements. Upon determining that the Company has discontinued operations, certain footnote disclosures are required to enable to user of the financial statements to understand the impact of the decision. These disclosures include:
Conclusion:
In conclusion, discontinued operations accounting under U.S. GAAP involves several intricate considerations, ranging from initial classification and separating the results of the discontinued operations from those of the continuing operation to subsequent measurement and reporting. Adherence to these standards ensures transparency and comparability in financial reporting, providing stakeholders with a clear understanding of the company’s performance and strategic decisions.
As businesses continue to evolve, a comprehensive understanding of discontinued operations accounting remains essential for financial professionals and investors alike.