SEC Clarifications on Accounting for Discontinued Operations

DISCLOSURE OF DISCONTINUED OPERATIONS

Certain disclosures are required for

the periods from the measurement date to the disposal date:

• Identification of the discontinued segment

• Expected disposal date and manner of disposal (sale or abandonment)

• Remaining assets and liabilities of segment at the balance sheet date

• Results of operations and any proceeds from disposal of the segment during the period from the measurement date to the balance sheet date (and a comparison with any prior estimates)

Disclosure of per share data, although not separately required for discontinued operations, is commonly given on the face of the income statement or in the notes.

In the Staff Accounting Bulletin (SAB) 93, “Accounting and Disclosure Regarding Discontinued Operations,” the SEC considered seven clarification issues with respect to discontinued operations:

(1) the method of disposal is not determined,

(2) the disposal plan requires more than one year to complete,

(3) accounting for the abandonment of a business segment,

(4) disposal of an operation with significant interest retained,

(5) classification and disclosure of contingencies relating to discontinued operations,

(6) accounting for subsidiaries that management intends to sell, and

(7) accounting for the spin-off of a subsidiary.

(i) Method of Disposal Not Determined.

 The SEC considered the circumstances where an entity adopts and announces a plan to discontinue a segment but has not determined the manner by which certain material operations will be discontinued (sale, spin-off, or liquidation). The SAB indicates that in such circumstances paragraph 14 of APB 30 has not been complied with since the “expected method of disposal . . . and the expected proceeds or salvage to be realized by disposal” are not known.

(ii) Plan of Disposal Requiring More than One Year.

 Where there are multiple sales of assets or divisions contemplated under a plan of disposal, all such sales should occur within one year. The SEC believes that to qualify under paragraphs 15–17 of APB 30 for classification outside of continuing operations, the plan of disposal must contemplate the consummation of the disposal of all portions of the business segment within 12 months of the plan’s adoption. The staff of the SEC believes that the accounting estimates needed under accounting for a discontinued operation cannot be developed with sufficient reliability if projections beyond 12 months from the plan’s adoption are required.

(iii) Accounting for Abandonment of a Business Segment.

If a company adopts a plan of discontinuance but is required by contract or regulation to continue to provide services for periods remaining under existing contracts which may exceed one year, discontinued operation accounting may be appropriate. The staff will not object if discontinued accounting is used when the company will not accept new business (other than it is required to do under existing contracts or regulations) within 12 months of a plan’s adoption. The operating results of the segment through final termination must be estimable with reasonably accuracy.

(iv) Disposal of Operation with Significant Interest Retained.

When a company sells a majority interest in a segment but retains an interest sufficient to require equity accounting under APB 18, discontinued accounting is not appropriate. The staff believes that the transaction should be accounted for as a disposal of a portion of a line of business.

(v) Classification and Disclosure of Contingencies Relating to Discontinued Operations.

If a company had appropriately accounted for the disposal of a segment in a previous year, but had continuing obligations under the contract so that estimates were required, revisions of those estimates are to be classified as discontinued operations as indicated in paragraph 25 of APB 30. However, the staff believes that any changes in the carrying value of assets received in the exchange as consideration should be classified within continuing operations.

(vi) Accounting for Subsidiaries That Management Intends to Sell.

When a company plans to sell a segment but discontinued accounting is not yet appropriate, the company cannot deconsolidate the segment under the view that control is temporary under SFAS 94. The staff believes that the concept of control as indicated in SFAS 94 does not encompass planned sales. The concept of temporary control is intended to encompass events that are outside the control of the entity.

(vii) Accounting for the Spin-Off of a Subsidiary.

If a company spins off a subsidiary, it should not ordinarily account for the transaction by restating previous financial statements as a change in entity under paragraph 30 of APB 20, as if the company never had an investment in the subsidiary. In limited circumstances involving an initial public offering (IPO), the staff has not objected to such accounting if the spin-off was completed prior to the effectiveness of the offering and certain conditions are met.