Accounting For Discontinued Operations

DISCONTINUED OPERATIONS

In general, the term discontinued operations refers to the operations of a “segment of a business” which has been or is planned to be abandoned or otherwise disposed of. The term segment of a business is defined as a component of an entity whose operations encompass a separate major line of business or class of customer. A component can be a subsidiary, division, joint venture, or unconsolidated investee. This definition of segment of a business should not be confused with the use of the term segment in Statement of Financial Accounting Standards (SFAS) No. 14, “Financial Reporting for Segments of a Business Enterprise.”

MEASUREMENT DATE. The component should be reported as discontinued during the first reporting period in which management having the requisite authority commits itself to a formal plan of disposal. This is referred to as the measurement date. Once the decision to dispose of the component has been made, the component’s operating results prior to the measurement date should be presented on the income statement as a separate category before extraordinary items. Any financial statements for a prior period, presented for comparative purposes, should be restated to conform to this presentation. The formal plan of disposal should include

(1) an identification of the major assets to be disposed,

(2) the expected method of disposal,

(3) the expected period required to complete the disposal, which should generally be within 12 months of the plan’s adoption,

(4) an estimate of the results of operations from the measurement date to the disposal date (phase-out period), and

(5) the estimated proceeds to be realized by disposal.

DISPOSAL DATE. The disposal date is the closing date if a sale is contemplated. Any gain or loss on the actual disposal of the segment, combined with the operating results of the discontinued operations, should be disclosed separately on the face of the income statement or in a note. Income taxes applicable to both items should also be disclosed on the face of the income statement or in a note to the financial statements.

RECORDING DISCONTINUED OPERATIONS.

The method of recording the discontinuation or disposition of a business segment is determined by whether there is a gain or a loss. A gain should be recognized when it is realized, usually at the disposal date. Losses, on the other hand, should be anticipated and recorded at the measurement date. The gain or loss on disposal is calculated at the measurement date, using estimates of the results of operations during the phaseout period. The APB was concerned that the gain or loss on disposal could conceal normal write-downs on a going-concern basis, for example, inventory or receivable adjustments. Thus it stated that such write-downs should be included in results of operations prior to the measurement date unless clearly and directly associated with the disposal decision. The Emerging Issues Task Force (EITF) in Issue No. 85-36, “Discontinued Operations with Expected Gain and Interim Operating Losses,” considered the need for clarification of APB Opinion No. 30 and the related interpretations thereof in accounting for any expected losses from the measurement date to the disposal date when a gain on disposal was expected. The Task Force consensus stated that estimated losses from operations should only be deferred until the disposal date if there is reasonable assurance that a net gain will be realized. The Task Force also reached consensus on two underlying issues. The first consensus applied the previous consensus to sales that do not meet the criteria of a segment. Second, it stated that all multiple disposals of segments under the same formal plan should be reported as a combined amount. However, if the criteria for discontinued segments are not met, these disposals, such as a portion of a line of business, should not be combined.

ACCOUNTING FOR DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED.

The EITF, “Accounting for Discontinued Operations Subsequently Retained” in Issue 90-16, considered a situation in which a company decides to dispose of a segment of its business in accordance with APB No. 30. In accruing the loss on disposition of the segment, the company wrote down assets to net realizable value. The assets would not have been treated as impaired and no loss would have been accrued if the company had not decided to discontinue the operations of that segment. In the next period, management decided to retain the segment. The following accounting issues are present:

• Issue 1—Should any of the accrued losses on writing down the segment to net realizable value be reversed now that the segment is no longer being discontinued?

• Issue 2—Should the financial statements of the prior period be restated or reclassified as a result of the subsequent decision to retain the business segment?

The EITF reached a consensus that the remaining estimated accrued loss should be reversed in the period the company decides to retain the business segment. The portion of the prior period loss related to actual operations of the business in the prior period should not be reversed. There is to be continual evaluation of the business segment following impairment guidelines as practiced by the company, and any individual asset impairments are to be classified as continuing operations.

The EITF concluded that the reversal is not an error and the prior periods should not be restated. However, the business segment’s results of operations reported in prior periods should be reclassified from discontinued to continuing operations. The remaining estimated accrued loss should continue to be reported as discontinued segments in the prior period financial statement. In the current reporting period, continuing operations should include current period operating results of the segment. The remaining unaccrued loss should be reversed as part of discontinued operations. For those filing with the Securities and Exchange Commission, the observer called for the following six additional disclosures:

1. Reason for reversal of decision

2. Total segment assets, liabilities, revenues, and operating results of the segment previously reported as discontinued

3. Amount of loss recognized when the segment was recorded at net realizable value and basis for calculation

4. Disclosure of impairment losses recorded by business segment (Losses due to asset impairment must be classified before income from continuing operations.)

5. Disclosure of amount and components of amounts of accrued losses subsequently reversed

6. Management discussion and analysis (MD&A)

ALLOCATION OF COSTS AND EXPENSES. The EITF also considered the questions of whether interest or general corporate overhead could be allocated to a discontinued operation. The Task Force reached a consensus that general corporate overhead may not be allocated. Interest may be allocated, although it is not required to be allocated. If interest is allocated, the calculation of the method to be used is described in EITF Issue No. 87-24, “Allocation of Interest to Discontinued Operations.” The SEC observer indicated that public companies must clearly disclose the accounting policy to allocate interest, the method used to determine the amount of interest allocated+