F1 - M5 - Discontinued Operations

Question 1

What items can be discontinued operations?

Answer 1

• Component of an entity
• Group of components of an entity
• Business
• Nonprofit Activity

Question 2

Component of an entity

Answer 2

• Lowest level for which operations and cash flows can be clearly distinguished
• Has separate revenue/expenses
• Can be sold of separately from the rest of the business

Question 3

What does GAAP consider to be a component of an entity?

Answer 3

• Operating segment
• Reportable segment
• Reporting unit
• Subsidiary
• Asset group

Question 4

Business

Answer 4

Integrated set of activities and assets that are conducted and managed for the purpose of providing a return to investors or other owners, members, or participants

Question 5

Non-Profit Activity

Answer 5

Integrated set of activities and assets that are conducted and managed for the purpose of providing benefits, other than goods or services at a profit, to fulfill an entity’s purpose or mission

Question 6

Where are discontinued operations located on an income statement?

Answer 6

• Bottom of the income statement after income from continued operations (Category #3)
• Reported separately as net of tax
• Recognized Gain/Loss on Sale is disclosed on the face of the income statement or in the footnotes

Question 7

What are the criteria for a component to be classified as Held for Sale

Answer 7

All must be met:

1 - Management commits to a PLAN to sell the component.
2 - Component is AVAILABLE FOR IMMEDIATE SALE in its present condition
3 - ACTIVE PROGRAM to initiate buyer has been initiated
4 - Sale of component is PROBABLE and is expected to be complete within ONE YEAR
5 - Sale of component is ACTIVELY MARKETED
6 - Unlikely that significant changes to the plan will be made or that the plan will be withdrawn

Question 8

When can a component be reported as a discontinued operation?

Answer 8

• If it has been disposed of OR classified as Held for Sale
• If the disposal represents a strategic shift that has or will have a major effect on the entity’s operations and financials

Question 9

What are the calculations resulting from discontinued operations?

Answer 9

1) Impairment Loss
2) Gain/Loss on operations (up until date of sale)
3) Gain/Loss on disposal (sale)

Question 10

Impairment Loss

Answer 10

Selling Price (NRV) < Book Value (Carrying Value)

Question 11

What happens if the discontinued operation is held for sale but fair value increases before the component is sold?

Answer 11

The previously reported impairment loss can be reversed.. BUT only up to the amount of the impairment loss.

Question 12

Once management decides to dispose of a component, what happens to depreciation?

Answer 12

Depreciation and amortization stops once the asset is classified as held for sale.

Question 13

Anticipated future gains or losses on held for sale assets

Answer 13

Losses are considered when computing the impairment analysis

Gains are recognized when they occur

Gain/Loss not previously recognized that results from sale of the component is recognized at date of sale

Question 14

Directly Related Components of an Entity

Answer 14

1) Have a cause-and-effect relationship; and

2) Occur within one year of disposal

Question 15

Measurement and Valuation of Held for Sale Assets

Answer 15

Lower of Book (Carrying) Value OR NRV (FV - Cost to Sell)

Question 16

If an asset is classified as held for sale or sold in the middle of the year, how are the operating and financial results reported?

Answer 16

The results are reported in discontinued operations in the period the component is held for sale or sold. This includes current period results and all prior period results presented.

Ex: If classified as held for sale in November, the financial results for the ENTIRE year would be in discontinued operations.

Question 17

What is the earliest period that a component of an entity can be reported in discontinued operations?

Answer 17

When the component is classified as held for sale (must me the six criteria).

Question 18

How are discontinued operations that occur midyear initially reported?

Answer 18

They should be included in net income and disclosed in the interim financial statement notes

Question 19

When should a component be reported as income from continuing operations?

Answer 19

If the transaction is unusual in nature and/or infrequently occurring.

Examples: retiring debt early, hurricane damage