Discontinued operations definition
/How to Report Discontinued Operations
Discontinued operations are the results of operations of a component of an entity that is either being held for sale or which has already been disposed of. The designated results of operations must be reported as a discontinued operation within the financial statements if both of the conditions noted below are present.
Resulting Elimination
The disposal transaction will result in the operations and cash flows of the component being eliminated from company operations.
Continuing Involvement
There will be no significant continuing involvement by the company in the operations of the component, once the disposal transaction has been completed. Continuing involvement implies the ability to influence the operating or financial policies of the disposed component.
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Examples of Discontinued Operations
The following are examples of the accounting for discontinued operations:
(1) Armadillo Industries plans to cancel one of its pressurized container products, due to a lack of sales. The product is part of a larger product group for which cash flows are tracked. Since Armadillo does not track cash flows at the individual product level, there is no need to classify operations related to the single product as a discontinued operation.
(2) Upon further consideration, Armadillo decides to list the entire container product group for sale. Since cash flows are associated with this larger group, Armadillo should classify it as a discontinued operation.
(3) Armadillo sells one of its retail stores to a distributor and enters into an agreement to supply goods to the new owner of the store. The result will be that the majority of cash flows will continue from the store, despite the change in ownership. In this case, it is not appropriate to classify the store as a discontinued operation.
(4) Armadillo sells one of its product lines. Part of the sale agreement stipulates that the buyer will pay Armadillo a 5% royalty on any sales related to the product line for the next three years. Armadillo will have no continuing operational involvement in the product line. Since Armadillo will have no significant continuing involvement and the resulting cash flows are indirect, the product line should be disclosed as a discontinued operation.
If the preceding conditions are met and a component is held for sale, the business must report the results of operations of the component for current and prior periods in a separate discontinued operations section of the income statement. Under the same conditions but where the component has been sold, the business must report the results of operations of the component for current and prior periods, as well as any gain or loss on disposal, in a separate discontinued operations section of the income statement.
For example, Armadillo Industries has decided to put its money-losing body armor division up for sale, which results in the following reporting in the lower part of its income statement:
Additional Discontinued Operations Disclosure Rules
If there were adjustments for disposal-related amounts previously reported for discontinued operations, they should be classified separately within the discontinued operations section of the income statement in the current period. Examples of these adjustments are:
Benefit plan obligations. Contingencies related to employee benefit plan obligations are settled, such as postemployment benefits. This type of adjustment is usually restricted to being classified within discontinued operations if it occurs no later than one year following the disposal transaction, unless delayed by circumstances beyond the control of the company.
Contingent liabilities. Contingencies related to liabilities associated with a disposal transaction are subsequently resolved, such as site remediation liabilities retained by the seller.
Contingent terms. Contingencies related to terms under which a disposal transaction was concluded are subsequently resolved, such as adjustments to the initial price paid.
If the buyer of a discontinued operation assumes the debt associated with the operation, any interim interest expense incurred by the seller should be allocated to discontinued operations. GAAP specifically does not allow the allocation of general corporate overhead to discontinued operations.