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New Definition of Discontinued Operation Heads to Publication

January 16, 2014

The FASB revisited two small issues that held up publication of its plan to revamp the definition of a discontinued operation so businesses would not have to treat routine sales and disposals as major events. The board plans to publish the accounting standard by the end of March.

The FASB on January 15, 2014, settled two narrow issues that had delayed the finalization of its new definition of a discontinued operation, setting the accounting standard on track for publication by the end of the first quarter.

The last-minute issues dealt with the date by which private companies would have to comply with the new standard and a footnote disclosure about cash flows of a discontinued operation that companies said was too difficult and costly to compile.

Despite objections from some private companies, the FASB decided to retain the effective date for private companies, which is annual and interim periods that start after December 15, 2015. It’s expected that private companies operating on calendar years will apply the new guidance in their first-quarter 2016 financial statements but will have the option to adopt it early for prior periods. Conduit bond obligors will have to apply the new standard at the same time as other public companies—for annual and interim periods that start after December 15, 2014, the board also decided.

On the disclosure issue, the board agreed that it would give companies the option to disclose the cash flows of a discontinued operation or just disclose depreciation and amortization, capital expenditures, and significant noncash items.

A majority of board members said they believed this was a good balance between calling for important information and giving companies the flexibility to offer different kinds of details that may also be useful.

“I can see usefulness of the information; I do recognize that we’re trying to improve disclosures in this area,” FASB member Daryl Buck said. “I am sympathetic, though, to the difficulties that have been described.”

The FASB in April released Proposed Accounting Standards Update (ASU) No. 2013-230, Reporting Discontinued Operations, to address more than a decade of complaints, especially from the real estate industry, that FASB ASC 205-20, Presentation of Financial Statements—Discontinued Operations, formerly SFAS No. 144, forces businesses to account for routine sales of assets as discontinued operations.

Proposed ASU No. 2013-230, says only disposals of assets that result in the closing of a major business line or exiting from an important market would qualify for discontinued operations reporting. It calls such disposals “significant strategic shifts.” The stipulation about a strategic shift changes current U.S. GAAP, which says a “component of an entity” that is a reportable segment, a reporting unit, a subsidiary, or an asset group is eligible for discontinued operations presentation.

Businesses would still have to provide information about these disposals in their footnotes, however. The proposal called for disclosures about operating, investing, and financing cash flows, as well as disclosures about an organization’s continued involvement with a discontinued operation.

Many businesses and auditors were concerned about the volume of the proposed disclosures and some raised red flags about the cash flow information. During the external review of the draft standard, some businesses told the FASB that for companies with large shared service centers that manage cash centrally, it would take three to six months to compile this information.

For those businesses, invoices and purchase orders are not segregated by business unit or operating segment and operating cash flows related to receivables and payables are managed and tracked at the corporate level rather than at lower-level business units or operating segments. These businesses would miss their quarterly and annual filing deadlines if they had to wait for this information, they told the board.

“I feel strongly about this disclosure, particularly because we’ve raised the level of a discontinued operation, and I believe for these larger, bigger, transformative events, we should be providing more information on the financial statement about a discontinued operation,” FASB project manager Phil Hood said. “On the other hand, I’m sympathetic to difficulties of getting this information prior to filing deadlines.”

The board did not want to scrap the disclosure requirement altogether, however, because some companies voluntarily disclose this information now. As a compromise, the board settled on giving businesses the option to report cash flow information or instead disclose depreciation and amortization, capital expenditures, and significant noncash items.

As for the private company effective date question, it only affected private companies that draw up quarterly financial statements. Those companies questioned how they could potentially apply the new guidance for annual statements without reassessing their discontinued operation presentation in the interim period, which would be provided under the old definition.

“They were confused because with the effective date we proposed for non-public entities, they’re going to apply to annual periods first,” Hood said. “For those that have interims, they could be reporting under the old definition and the annual period could reverse what they did at interim if the disposal doesn’t meet the new definition of a discontinued operation.”

A majority of FASB members said this narrow scenario was not worth delaying the effective date of the standard, particularly because private companies that file quarterly financial statements are typically larger businesses that more closely follow accounting standards changes than smaller operations. Those companies could have the option to adopt the new guidance early, FASB members said..

“If you’re doing interims, you’re likely to be one of the bigger ones, a bigger non-public entity, and are more likely to follow what we’re doing and have the ability to early adopt and alleviate the problem,” FASB member Marc Siegel said.