Presentation and Disclosure of Discontinued Operations and Component Disposal

✦ Discontinued operations refer to components of an entity that have been disposed of or are held for sale and represent a strategic shift in operations.

✦ Under ASC 205-20, results of discontinued operations must be presented separately in the income statement net of tax.

✦ A qualifying component must represent a major line of business, geographical area, or a significant shift in business strategy.

✦ Disclosure includes the nature of the disposal, major classes of assets and liabilities, and income effects of the discontinued operation.

1. Definition of Discontinued Operations

✦ A discontinued operation is a component of an entity that:

 • Has been disposed of, or is classified as held for sale, and

 • Represents a strategic shift that has a major effect on the entity’s operations and financial results

✦ Components may include:

 • Reporting segments

 • Operating divisions

 • Business units or product lines

2. Criteria for Held-for-Sale Classification

✦ Under ASC 360-10-45-9, a component is held for sale if:

 • Management commits to a plan to sell

 • Asset is available for immediate sale in its present condition

 • Sale is probable and expected within one year

 • Active program to locate a buyer is initiated

✦ Once classified as held for sale, depreciation stops and the asset is measured at the lower of:

 • Carrying amount, or

 • Fair value less cost to sell

3. Income Statement Presentation

✦ Present results of discontinued operations net of tax in a separate section below income from continuing operations.

✦ Include:

 • Operating income or loss of the component

 • Gain or loss on disposal, if applicable

Example income statement section:

Income from discontinued operations, net of tax – $XXX

✦ Do not allocate general corporate overhead unless clearly related to the discontinued segment.

4. Journal Entry — Disposal of Discontinued Operation

Example:

• Proceeds from sale = $900,000

• Net assets = $750,000

• Gain = $150,000

Entry:

debit Cash – $900,000

 credit Net Assets of Component – $750,000

 credit Gain on Disposal – $150,000

5. Balance Sheet Presentation

✦ Classify assets and liabilities of the discontinued operation separately as:

 • Assets held for sale

 • Liabilities associated with assets held for sale

✦ Present separately from other current and noncurrent assets/liabilities.

6. Disclosure Requirements

✦ Disclose:

 • Description of the discontinued operation and facts of the disposal plan

 • Pre-tax profit/loss of the discontinued operation

 • Gain or loss recognized on disposal

 • Major classes of assets and liabilities included in the disposal group

 • Cash flows from operating, investing, and financing activities of the discontinued operation

7. IFRS Comparison (IFRS 5)

Topic	US GAAP (ASC 205-20, 360)	IFRS (IFRS 5)
Definition of discontinued ops	Strategic shift or major line	Same criteria
Held-for-sale criteria	Specific list under ASC 360	Similar but more principle-based
Presentation	Separate net-of-tax section	Similar
Depreciation on held-for-sale	Ceases	Ceases

8. Common Errors

✦ Misclassifying disposals that don’t meet strategic shift criteria as discontinued

✦ Continuing depreciation after held-for-sale classification

✦ Omitting separate disclosure of discontinued operations in financials

✦ Failing to include all related assets and liabilities in the disposal group

✦ Inconsistent presentation of prior period financials without restating discontinued components