Discontinued operations
Typical coverage of US GAAP
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Criteria for classification as non-current assets held for sale
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Criteria for classification as discontinued operations
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Valuation of discontinued operations
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Impact on depreciation
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Presentation of discontinued operations:
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Impact on comparative financial statements:
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Balance sheet presentation
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Income statement presentation
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Cash flow presentation
Treatment when no longer qualified as a non-current asset held for sale
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Executive summary
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Under both IFRS and US GAAP, a discontinued operation represents a component of an entity
that has been disposed of or is held for sale.
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IFRS narrowly defines what qualifies as a discontinued operation.
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With the issuance of ASU No. 2014-08, US GAAP more narrowly defines what qualifies as a
discontinued operation. ASU No. 2014-08 removed the ASC 205-20-45-1 requirements that:
“(a) the operations and cash flows of the component have been (or will be) eliminated from the
ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not
have any significant continuing involvement in the operations of the component after the
disposal transaction.”
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This change results in greater conformity with IFRS, which does not have similar requirements.
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ASU No. 2014-08 is effective for all disposals that occur with annual periods beginning on or
after December 15, 2014. Early adoption is only permitted for disposals that have not been
reported in previous financial statements.
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Executive summary
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There are differences in the presentation of discontinued operations:
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Statement of financial condition – IFRS does not require restatement of comparative
information, while US GAAP does require comparative information.
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Income statement – IFRS requires more extensive disclosures regarding income taxes than
US GAAP.
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Cash flows – IFRS 5.33 requires comparative disclosure of “the net cash flows attributable
to the operating, investing and financing activities,” while US GAAP (ASC 205-20-50-5Bc)
requires either comparative disclosure of the net cash flow effect of discontinued operations
on operating and investing activities or disclosure of “depreciation, amortization, capital
expenditures and significant operating and investing noncash items of the discontinued
operation”.
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Primary pronouncements
US GAAP
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ASC 205-20, Discontinued Operations
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ASC 360, Property, Plant, and Equipment
IFRS
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IFRS 5, Non-current Assets Held for Sale and
Discontinued Operations
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IAS 36, Impairment of Assets
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Progress on convergence
►
In September 2008, the Boards issued proposed amendments to
ASC 205-20 and IFRS 5 to converge the definition of discontinued
operations as well as the related disclosure requirements.
► In April 2010, the Boards agreed that the ED should be
republished.
► In the board meeting held on March 29, 2011, the IASB
determined not to issue an ED until the FASB issues it’s ED and
received feedback.
► At the FASB December 12, 2012 meeting, the board voted to
issue an updated ED.
► On April 10, 2014, the FASB issued ASU No. 2014-08, which
defines a discontinued operation similarly to IFRS 5.
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Criteria for classification as non-current assets held for sale
US GAAP
IFRS
The following criteria must be met for a non-current asset (disposal
group) to be classified as held for sale:
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The assets are available for immediate sale in their present
condition.
Management commits to a plan to sell the assets.
Management is actively seeking a buyer.
The sale is probable and will generally occur within one year.
The selling price is reasonable in relation to the current value.
It is unlikely there will be any significant changes to the plan to
sell the assets.
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Similar
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Criteria for classification as non-current assets held for sale
US GAAP
IFRS
►
It must be probable the sale will occur
within one year.
►
The guidance on discontinued operations
in ASU 205-20 does not apply to oil and
gas properties that use the full-cost
accounting method.
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It must be “highly probable” the sale will
occur within one year. IFRS 5, Appendix A,
defines highly probable as “significantly
more likely than probable.”
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Under IFRS 5 long-lived assets to be
exchanged are recorded as held for sale.
Under US GAAP (ASC 360-10-45-15) a
long-lived asset to be exchanged rather
than sold should be classified as held and
used until it is disposed of.
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Criteria for classification as discontinued operations
US GAAP
IFRS
A discontinued operation is defined as a
component of an entity that is held for sale or
has been disposed. The definitions under both
standards generally allow the inclusion of
major lines of business and major geographic
areas of operation.
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Similar
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Criteria for classification as discontinued operations
US GAAP
IFRS
With the issuance of ASU No. 2014-08,
only disposals of components that
represent a strategic shift which has a
major effect on operations will be reported
as discontinued operations.
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Does not have the strategic shift
requirement, but for all practical
purposes, there will be conformity for
all practical purposes.
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Criteria for classification as discontinued operations
US GAAP
IFRS
Under both US GAAP (ASC 205-20-45-1E) and IFRS (IFRS 5.7 and IFRS 5.8),
all the following criteria must be met for classifying a component of an entity as
held for sale:
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The assets are available for immediate sale in their present condition.
Management commits to a plan to sell the assets.
Management is actively seeking a buyer.
The sale is probable and likely will occur within one year.
The selling price is reasonable in relation to the current value.
It is unlikely there will be any significant changes to the plan.
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Disclosure for components that do not qualify as
discontinued operations
US GAAP
►
ASU No. 2014-08 requires some
disclosures for individually significant
components that do not qualify as
discontinued operations.
IFRS
►
No similar requirement.
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Criteria for discontinued operations example
Example 1 – criteria for classification as a discontinued operation
The Copper Mining Company (CMC) is a fully integrated copper company. CMC has three
separate operating segments. The mining segment mines the copper and had revenues of
$1.0 billion and a net negative cash flow of $0.2 billion. The industrial segment smelts the copper
into ingots and had revenues of $1.2 billion and a net cash flow of $0.2 billion.
The distribution segment sells the copper ingots to third parties and had
revenues of $1.5 billion and a net cash flow of $0.3 billion.
Management of CMC has received an unsolicited offer from a competitor for
its industrial segment, which it believes reflects the fair value of these
operations. The competitor wants to complete the purchase in the next three
months. CMC’s Board of Directors has authorized management’s plan to
immediately sell its industrial segment to this competitor and retain the
remaining two segments.
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Criteria for discontinued operations example
Example 1 (continued):
As part of the proposed purchase, the competitor requires CMC to
agree to process all its copper ore through its smelters for the next five
years at a cost of 4 cents per ton. This is slightly less than CMC’s
current cost of smelting the ore. The competitor also requires that
CMC’s management continues to manage the industrial segment for six
months after the sale. This will allow the competitor to hire its own
management team to run the smelting operations. As is currently the
case, CMC’s distribution segment would then sell the copper ingots to
third parties.
►
Does CMC’s industrial segment qualify as a discontinued operation
under US GAAP and IFRS? Explain your answer.
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Criteria for discontinued operations example
Example 1 solution:
For both US GAAP and FRS:
► The requirements for classification of the industrial segment as a discontinued non-current asset
held for sale have been met:
► The assets are available for immediate sale in their present condition.
► Management has committed to a plan to sell the assets.
► It has a buyer.
► The sale is probable and likely will occur within one year.
► The selling price is reasonable in relation to the current value.
► It is unlikely there will be any significant changes to the plan to sell the assets.
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Valuation of discontinued operations
US GAAP
IFRS
A non-current asset held for sale or a disposal
group held for sale should be remeasured at
the lower of its carrying value or fair value less
selling costs. Any resulting gain or loss will be
included in the income or loss of the
discontinued operations.
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Similar
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Impact on depreciation
US GAAP
IFRS
Both US GAAP and IFRS specify that assets
held for sale should not be depreciated.
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Similar
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Presentation
Impact on comparative financial statements
US GAAP
IFRS
Disclosure of relevant information regarding
the discontinued operations is required.
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Similar
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Presentation
Statement of financial position
US GAAP
IFRS
Assets and liabilities of discontinued
operations must be shown separately.
Similar
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Presentation
Statement of financial position
US GAAP
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IFRS
ASC 205-20-50-5Be requires disclosure
of “the carrying amount(s) of the major
classes of assets and liabilities included
as part of a discontinued operation
classified as held for sale for the period in
which discontinued operation is classified
as held for sale and all prior periods
presented in the statement of financial
position.”
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Does not require restatement of
comparative information.
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Statement of financial position example
Example 2a – statement of financial position presentation example
Company A has met all the requirements for accounting for a discontinued operation under both
US GAAP and IFRS in its 2014 comparative financial statements. Indicate the minimum required
disclosure for discontinued operations by placing an X in the chart below. If the disclosure is not
mandatory, place an NR (not required) in the chart.
US GAAP
2014
2013
IFRS
2014
2013
Cash – which
is immaterial
Total assets
Total liabilities
Net assets
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Statement of financial position example
Example 2a solution:
US GAAP
IFRS
2014
2013
2014
2013
NR
NR
NR
NR
Total assets
X
X
X
NR
Total liabilities
X
X
X
NR
NR
NR
NR
NR
Cash
Net assets
Both US GAAP and IFRS require that assets and liabilities of discontinued operations be shown
separately on the statement of financial position. IFRS does not require restatement of
comparative information on the statement of financial position. US GAAP requires restatement of
comparative information on the statement of financial position.
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Presentation
Income statement
US GAAP
IFRS
The results of discontinued operations must be
shown separately from continuing operations.
Similar
Comparative information must be restated.
Similar
Revenue, expenses, pretax income (loss) and
any gain (loss) on remeasurement for
discontinued operations must be disclosed.
Similar
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Presentation
Income statement
US GAAP
►
IFRS
Requires disclosure of the total tax income
related to discontinued operations.
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Requires disclosure of income taxes on
discontinuance and income taxes on
discontinued operations.
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Income statement presentation example
Example 2b – income statement
presentation
Using the information from the previous
example, indicate the minimum required
disclosure for discontinued operations by
placing an X in the chart. If the disclosure
is not mandatory place an NR (not
required) in the chart.
US GAAP
2014
2013
IFRS
2014
2013
Revenue
Expenses
Pretax income
Income tax on
operations
Income tax on gain
or loss on
discontinuance
Net interest
income (expense)
Total income taxes
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Income statement presentation example
Example 2b solution:
► Both US GAAP and IFRS require the
results of discontinued operations be
shown separately from continuing
operations on the income statement.
Comparative information on the income
statement must be restated.
► Both require disclosure of revenue,
expenses and pretax income (loss) for
discontinued operations.
► US GAAP requires disclosure of the total
income tax related to discontinued
operations.
► IFRS requires disclosure of income taxes
on operations and income taxes on gains
(losses) related to discontinuance.
US GAAP
2014
2013
2014
2013
Revenue
X
X
X
X
Expenses
X
X
X
X
Pretax income
X
X
X
X
NR
NR
X
X
NR
NR
X
X
NR
NR
NR
NR
X
X
NR
NR
Income tax on
operations
Income tax on gain
or loss on
discontinuance
Net interest
income (expense)
Total income taxes
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IFRS
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Presentation
Cash flows
US GAAP
IFRS
Requires cash flow disclosures for
discontinued operations Restatement of
comparative information for prior periods is
also required.
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Similar
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Presentation
Cash flows
US GAAP
►
IFRS
ASC 205-20-50-5Bc requires either
disclosure of the net cash flow effect of
discontinued operations on operating and
investing activities or disclosure of
“depreciation, amortization, capital
expenditures and significant operating and
investing noncash items of the
discontinued operation”.
►
IFRS 5.33 requires disclosure of the net
cash flow effect of discontinued operations
on operating, investing and financing
activities in either the notes or on the face
of the financial statements.
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Cash flows presentation example
Example 2c – cash flows presentation
Using the information from the previous example, indicate the minimum required disclosure for
discontinued operations by placing an X in the chart below. If the disclosure is not mandatory,
place an NR (not required) in the chart.
US GAAP
2014
IFRS
2013
2014
2013
Cash flows
attributable to:
Operating activities
Investing activities
Financing activities
Net cash flows
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Cash flows presentation example
Example 2c
solution:
US GAAP
IFRS
2014
2013
2014
2013
Operating activities
X*
X*
X
X
Investing activities
X*
X*
X
X
Financing activities
NR
NR
X
X
NR
NR
NR
NR
Cash flows attributable to:
Net cash flows
►
►
IFRS requires disclosure of “the net cash flows attributable to the operating, investing and financing
activities of discontinued operations. These disclosures may be presented in either the notes or on the
face of the financial statements.” Restatement of comparative information for prior periods is also
required.
*For discontinued operations, US GAAP requires either disclosure of operating and investing cash flows
or disclosure of depreciation, amortization, capital expenditures and significant operating and investing
noncash items.
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Treatment when no longer qualified as a non-current asset
held for sale
US GAAP
IFRS
A non-current asset held for sale should be
reclassified to assets held and used. The value of
these operations should be recorded at the lesser
of:
►The original carrying amount adjusted for any
depreciation (amortization) expense that would
have been recognized had the discontinued
operation been continuously classified as a
continuing operation.
► Its current fair value.
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Similar except recoverable
amount is used instead of fair
value.
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Treatment when no longer qualified as a non-current asset
held for sale
US GAAP
►
IFRS
Does not specify that revaluations must be
considered when determining the original
carrying amount. However, since these
operations are being valued at the lesser
of the adjusted original cost or the current
fair value, it is likely to result in the same
valuation. Therefore, this difference is not
significant.
►
The original carrying amount must also be
adjusted for any revaluations had the
discontinuing operation been continuously
classified as a continuing operation.
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