Determining and Accounting for Discontinued Operations
When a business entity has sold, disposed, or is selling a component of their business, management must evaluate if the component meets the criteria of “discontinued operations.” Making the distinction is important because it helps differentiate the entity’s continuing operations from operations that will no longer be reported on. This provides clarity to owners, investors, and stakeholders in the financial statements and will allow them to make decisions and predictions more easily. Discontinued operations apply to a single component or multiple components of a business that have been sold, disposed, or classified as held-for-sale at year end.
ASC 205-20 describes the criteria of discontinued operations. The three criteria are strategic shift, operational component, and financial impact. Management must determine the following:
- Does the component represent a strategic shift for the business? For instance, if it has a major effect on the financial statements going forward, if it is a sale or disposal of a major line of business, or if it is a change in an equity method investment, then the component would be classified as a strategic shift.
- Is the component a distinct line of business? For instance, if the component has its own product or services, if it is located in a particular geographical area, or if it is a subsidiary, then it would be considered to have a distinct line of business.
- Can the component be distinguished for financial reporting purposes? For instance, if the component has its own revenue, expenses, and cash flows, then it would be distinguishable on the financial statements.
If the answer is “yes” to all three questions noted above, the component needs to be classified as a discontinued operation.
Management should also consider acquisitions that meet the held for sale criteria as defined in ASC 360-10-45-1E. Any acquisition that meets these criteria should be accounted for as discontinued operations, even if it does not represent a strategic shift for the business.
Accounting for discontinued operations will have financial statement implications. The component is measured at the lower of its carrying value or fair value less any selling costs. If the carrying value of the component exceeds the fair value, then an impairment loss needs to be recognized. Financial results of the discontinued operations are presented separately from ongoing operations for the purposes of providing clarity on the financial statements. Assets and liabilities of the component can be reclassified as held-for-sale on the balance sheet. Revenues, expenses, gains, and losses are presented in a separate section of the income statement. Cash flows from discontinued operations are presented separately on the statement of cash flows. The notes to the financial statements need to disclose the nature of the component, the financial results, and the cash flow impact.
In summary, any business that is selling a portion of their operations should evaluate the criteria using the framework provided in ASC 205-20 to determine whether the transaction falls under discontinued operations or not. Doing so will enhance the quality of the financial statements for their readers.
If you have questions about the information outlined above, McKonly & Asbury’s experienced professionals are here to help. Learn more about our Healthcare practice by visiting our Healthcare industry page or by contacting the director of our Healthcare practice, Janice Snyder, Partner.
About the Author
Jesse is an Assurance Supervisor, where he specializes in serving nonprofit and healthcare organizations. He provides audit, assurance, and advisory services to a broad range of mission-driven entities, including charitable organizations, foundations, associations, and social service providers.
In his role, Jesse manages day-to-day audit operations, mentors junior staff, and works closely with clients to ensure timely and accurate financial reporting. His technical knowledge includes Uniform Guidance audits and Generally Accepted Government Auditing Standards (GAGAS). Known for his thoroughness and collaborative leadership style, Jesse is dedicated to building strong client relationships and delivering high-quality service. He is actively involved in staff training and plays a key role in process improvement initiatives within the firm.
