3.1 Discontinued Operations

Question 1

Identify the criteria that must be met for an operation to be classified as discontinued.

HINT: (2)

Answer 1

• It has been disposed of or is classified as held for sale
• Its disposal is a strategic shift that has (or will have) a major effect on an entity’s operations and financial results

Question 2

Provide 4 examples of a disposal being a strategic shift that will have a major effect on an entity’s operations and financial results

Answer 2

disposal of:

1 - A major geographical area,

2 - A major line of business,

3 - A major equity method investment, or

4 - Other major parts of an entity

Question 3

Define a component of an entity

Answer 3

• has operations and cash flows that are clearly distinguishable for operating and financial reporting purposes

Question 4

Provide 5 examples of a component of an entity

Answer 4

1 - A reportable segment,

2 - An operating segment

3 - A reporting unit,

4 - A subsidiary, or

5 - An asset group

Question 5

Income Statement Presentation:

How are discontinued operations presented in the income statement?

Answer 5

• separately net of tax
• after the results of continuing operations
• and in comparative statements

Question 6

Income Statement Presentation:

How are gains or losses on disposal of a component or discontinued operation presented on the income statement?

Answer 6

• must be disclosed on the face of the income statement or in the notes

Question 7

Income Statement Presentation:

How is a component or discontinued operation that’s classified as held for sale measured in the income statement?

Answer 7

• measured at the lower of its carrying amount or fair value minus cost to sell

Question 8

Income Statement Presentation:

How is depreciation or amortization of assets treated once a component or discontinued operation is classified as held for sale?

Answer 8

• operating results do not include depreciation or amortization of assets

Question 9

Income Statement Presentation:

What is included in the operating results of a component or discontinued operation classified as held for sale?

Answer 9

• any income earned or loss incurred during the entire reporting period (i.e., before and after the component was classified as held for sale)
• any loss for a write-down to fair value minus cost to sell recognized on the initial classification as held for sale and subsequently

Question 10

Income Statement Presentation:

How is disposal of an individually significant component reported in the income statement if it does not qualify for discontinued operation reporting?

Answer 10

• a gain or loss on its sale is included in income from continuing operations & disclosed in the notes (pretax)

Question 11

Statement of Financial Position Presentation:

How are the assets and liabilities of a discontinued operation classified as held for sale presented in the balance sheet?

Answer 11

• separately in the relevant sections of the statement of financial position for
  (1) the current period and
  (2) all comparative periods reported.

Question 12

Statement of Financial Position Presentation:

Can the assets and liabilities of a discontinued operation be netted or offset for balance sheet presentation?

Answer 12

No - they cannot be offset and presented as one amount

Question 13

Statement of Financial Position Presentation:

How are the carrying amounts of a discontinued operations major classes of assets and liabilities treated when it is initially classified as held for sale?

Answer 13

• Presented on the face of the statement of financial position or
• Disclosed in the notes for all periods reported