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Discontinued operations may be relevant for a carve-out business if either a part of the business historically included in the operations of the carve-out business will not be included in the divestiture transaction or if a part of the carve-out business was previously presented as discontinued operations in the historical financial statements of the parent entity. See FSP 27 for further guidance on the presentation of discontinued operations.
Discontinued operations will be rare under the management approach as the management approach includes only the net assets and related historical results that are being transferred as part of the divestiture transaction. However, discontinued operations could be relevant under the legal entity approach for a carve-out business in a spin-off when significant operations of the carve-out business remain with the parent.
Example CO 6-2 provides an example of assessing the discontinued operations criteria related to operations that are part of the historical results of a carve-out business but will remain with the parent.
EXAMPLE CO 6-2
Discontinued operations of a carve-out business applying the legal entity approach in a spin-off
Discontinued operations of a carve-out business applying the legal entity approach in a spin-off
Parent Entity intends to spin-off a subsidiary, Company X, on October 31, 20X1. As the divestiture transaction is a spin-off and the “depooling” criteria of SAB Topic 5.Z.7, Accounting for the spin-off of a subsidiary, codified as ASC 505-60-S99-1, are not met, the carve-out financial statements of Company X are prepared under the legal entity approach. In September 2oX1, Parent Entity decided that it will retain certain significant operations of Company X. Company X transfers the operations to be retained to Parent Entity on October 30, 20X1. For Company X, the spin-off represents a strategic shift that will have a major effect on its financial results.
How should Company X present the operations that it transfers to Parent Entity in its financial statements for the interim period ended September 30, 20X1 and the annual period ended December 31, 20X1?
Analysis
For a component to qualify as a discontinued operation at the balance sheet date, it must be disposed of (e.g., through sale, abandonment, or spin-off), or meet the held-for-sale criteria of ASC 360-10-45-9. As the operation were not transferred to Parent Entity until October 30, 20X1, the operations are not considered to be disposed of as of September 30, 20X1. Further, the operations will not meet the held-for-sale criteria because Company X is not selling the operations. Therefore, Company X should present the operations that it will transfer to Parent Entity as held and use and within continuing operations in its statement of operations for the interim period ended September 30, 20X1.
Company X should present the operations transferred to Parent Entity as discontinued operations in its statement of operations for the year ended December 31, 20X1 as the component was disposed of at the balance sheet date, and the operations represented a strategic shift that had a major effect on its financial results.
Even though the distribution to Parent Entity occurred before the end of a reporting period and therefore there are no assets and liabilities remaining on the current year balance sheet related to the disposal group, the prior period balance sheet must be recast. In a disposal transaction that qualifies as discontinued operations, ASC 205-20-45-10 requires the assts and liabilities of the entity being spun (i.e., being distributed to Parent Entity) to be presented separately in the assets and liabilities section of prior balance sheets. As such, if a comparable balance sheet is required for December 31, 20X0, reclassification of the assets and liabilities distributed to the Parent Entity into captions such as current and noncurrent assets of the discontinued operations and current and noncurrent liabilities of the discontinued operation would be required. The assets and liabilities cannot be netted as a single amount.
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