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27.5 Disclosure
Publication date: 31 May 2023
us Financial statement presentation guide
The minimum disclosure requirements for discontinued operations are prescribed by ASC 205-20-50. Individually significant disposals may not be eligible for discontinued operations in some instances (e.g., when it does not represent a strategic shift). In such circumstances, additional disclosures are required in accordance with ASC 360-10-50-3A. For guidance on these disclosure requirements, refer to FSP 8.6.2.
27.5.1 Financial statement disclosures
Disclosures required in periods in which disposal groups have been sold or are classified as held for sale that qualify as a discontinued operation are described below:
The following shall be disclosed in the notes to financial statements that cover the period in which a discontinued operation either has been disposed of or is classified as held for sale under the requirements of paragraph 205-20-45-1E:
a. A description of both of the following:
1. The facts and circumstances leading to the disposal or expected disposal.
2. The expected manner and timing of that disposal.
b. If not separately presented on the face of the statement where net income is reported (or statement of activities for a not-for-profit entity) as part of discontinued operations (see paragraph 205-20-45-3B), the gain or loss recognized in accordance with paragraph 205-20-45-3C.
c. Subparagraph superseded by Accounting Standards Update No. 2014-08.
d. If applicable, the segment(s) in which the discontinued operation is reported under Topic 280 on segment reporting
When a business or nonprofit activity is classified as held for sale upon acquisition and therefore is reported as a discontinued operation, no additional disclosures are required beyond those described above. A reporting entity that disposes of an equity method investment that qualifies as a discontinued operation should consider the additional disclosures in FSP 27.5.1.1. A reporting entity with component(s) that result in discontinued operations for any other reason should make the following disclosures to the extent the information is not presented on the face of its financial statements:
Excerpt from ASC 205-20-50-5B
An entity shall disclose, to the extent not presented on the face of the financial statements as part of discontinued operations, all of the following in the notes to financial statements:
- The pretax profit or loss (or change in net assets for a not-for-profit entity) of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- The major classes of line items constituting the pretax profit or loss (or change in net assets for a not-for-profit entity) of the discontinued operation (for example, revenue, cost of sales, depreciation and amortization, and interest expense) for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
Reporting entities must reconcile both (1) pretax profit or loss and (2) the major line items constituting pretax profit or loss to the after-tax profit or loss from discontinued operations that is presented on the face of the income statement. The reconciliation must be provided for all periods in which the results of the discontinued operation are presented. The example reconciliation provided in ASC 205-20-55-103 includes the line items of revenue, cost of sales, selling, general and administrative expenses, and interest expense.
A reporting entity may not have owned the entire discontinued operation prior to its disposal. If the discontinued operation includes a noncontrolling interest, the pretax profit or loss attributable to the parent should be separately disclosed for each of the periods that an income statement is presented.
27.5.1.1 Equity method investment discontinued operations disposals
When a reporting entity disposes of an equity method investment that qualifies to be presented as a discontinued operation, the reporting entity should disclose summarized information about the assets, liabilities, and results of operations of the investee if that information was disclosed in financial reporting periods before the disposal based on ASC 323-10-50-3(c), as further discussed in FSP 10.
27.5.1.2 Changes to a plan of disposal
A reporting entity may change its plan of sale of a component that was previously classified as a discontinued operation. In the period in which the decision is made to change the plan for disposing of the component, a reporting entity should determine if the revised plan impacts the component’s classification as a discontinued operation. If as a result of the revised plan the component no longer qualifies as a discontinued operation, the reporting entity should disclose a description of the facts and circumstances leading to the decision to change the plan. It should also disclose the change’s effect on the results of operations for the period and any prior periods presented. The results of operations should be reclassified from discontinued operations to income from continuing operations for all periods presented. Any loss on measurement at the reclassification date should be reported in continuing operations. Any loss recognized when the component was first classified as held for sale should not be adjusted in the prior period financial statements. See FSP 8.6.2 for the disclosure requirements of disposal groups that no longer meet the held-for-sale criteria.
Disclosures required when a reporting entity retains significant continuing involvement are discussed in the following subsections.
27.5.1.3 Continuing cash flows and continuation of activities
A reporting entity is required to disclose information about its significant continuing involvement with a discontinued operation after the disposal date. It must continue to make these disclosures until the results of operations of that discontinued operation are no longer presented in the income statement.
Excerpt from ASC 205-20-50-4B
An entity shall disclose the following in the notes to financial statements for each discontinued operation in which the entity retains significant continuing involvement after the disposal date:
a. A description of the nature of the activities that give rise to the continuing involvement.
b. The period of time during which the involvement is expected to continue.
c. For all periods presented, both of the following:
1. The amount of any cash inflows or outflows from or to the discontinued operation after the disposal transaction
2. Revenues or expenses presented, if any, in continuing operations after the disposal transaction that before the disposal transaction were eliminated in consolidated financial statements as intra-entity transactions.
A reporting entity may retain a noncontrolling investment in a disposed component and account for the component under the equity method prospectively. In those situations, there are additional disclosures required related to the equity method investment retained.
Excerpt from ASC 205-20-50-4B
d. For a discontinued operation in which an entity retains an equity method investment after the disposal (the investee), information that enables users of financial statements to compare the financial performance of the entity from period to period assuming that the entity held the same equity method investment in all periods presented in the statement where net income is reported (or statement of activities for a not-for-profit entity). The disclosure shall include all of the following until the discontinued operation is no longer reported separately in discontinued operations:
1. For each period presented in the statement where net income is reported (or statement of activities for a not-for-profit entity) after the period in which the discontinued operation was disposed of, the pretax income of the investee in which the entity retains an equity method investment
2. The entity’s ownership interest in the discontinued operation before the disposal transaction
3. The entity’s ownership interest in the investee after the disposal transaction
4. The entity’s share of the income or loss of the investee in the period(s) after the disposal transaction and the line item in the statement where net income is reported (or statement of activities for a not-for-profit entity) that includes the income or loss.
27.5.1.4 Segment disclosures
As discussed in ASC 280-10-55-7, a reporting entity is not required to disclose the information required by ASC 280, Segment Reporting, for a reportable segment that qualifies for discontinued operations reporting. In addition, segment information for periods prior to the disposal of the reportable segment is not required to be restated in the comparative periods.
A discontinued operation that is a portion of a reportable segment (e.g., one of three product lines that make up a reporting segment) would not be included in the segment disclosures in the period it is classified as a discontinued operation. Furthermore, prior periods would need to be restated for comparative purposes.
27.5.1.5 Adjustments to amounts reported in discontinued operations
Certain adjustments to amounts previously reported in discontinued operations should also be classified in discontinued operations in accordance with ASC 205-20-45-4 through ASC 205-20-45-5, ASC 205-20-50-3A, and ASC 205-20-S99-2. The nature and amount of such adjustments should be disclosed. Circumstances that could give rise to presenting amounts as discontinued operations in subsequent periods include:
- Resolution of contingencies related to the disposal transaction, such as the resolution of the purchase price and indemnification agreements
- Resolution of the disposed component’s contingencies, such as environmental and product warranty obligations retained by the seller
- Settlement of employee benefit obligations directly related to the disposal transaction
This guidance also applies to amounts not previously reported in discontinued operations that are directly related to the disposal component.
Developments subsequent to the disposal date that are not directly related to the disposal of the component are reported within continuing operations. For example, subsequent changes in the carrying value of assets received upon disposition of a component do not affect the determination of gain or loss at the disposal date, but represent the consequences of management’s subsequent decisions to hold or sell those assets. Gains and losses, dividend and interest income, and portfolio management expenses associated with assets received as consideration for discontinued operations are other examples of amounts not directly related to the disposal component.
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