1. Discontinued operations

2. Typical coverage of US GAAP
Criteria for classification as non-current assets held for sale
Criteria for classification as discontinued operations
Valuation of discontinued operations
Impact on depreciation
Presentation of discontinued operations:
Impact on comparative financial statements:
Balance sheet presentation
Income statement presentation
Cash flow presentation
Treatment when no longer qualified as a non-current asset held for sale

3. Executive summary
Under both IFRS and US GAAP, a discontinued operation represents a component of an entity that has been disposed of or is held for sale. In the 2010 edition of the AICPA’s Accounting Trends and Techniques, of the 500 companies surveyed, 44 companies discontinued or planned to discontinue the operations of a component of an entity.
IFRS narrowly defines what qualifies as a discontinued operation. US GAAP more broadly defines discontinued operations and could include asset groups smaller than those allowed under IFRS. ASC also requires that: “(a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.” There is no similar requirement in IFRS.

4. Executive summary
There are differences in the presentation of discontinued operations:
Balance sheet – IFRS does not require restatement of comparative information, while US GAAP does not provide any specific guidance on comparative information.
Income statement – IFRS requires more extensive disclosures than US GAAP.
Cash flows – IFRS 5.33 requires comparative disclosure of “the net cash flows attributable to the operating, investing and financing activities,” while US GAAP does not have a similar requirement.

5. Primary pronouncements
US GAAP
ASC , Discontinued Operations
ASC 360, Property, Plant, and Equipment
IFRS
IFRS 5, non-current Assets Held for Sale and Discontinued Operations
IAS 36, Impairment of Assets

6. Progress on convergence
In September 2008, the Boards issued proposed amendments to ASC and IFRS 5 to converge the definition of discontinued operations as well as the related disclosure requirements. The comment period on the ED ended in January In April 2010, the boards agreed that the ED should be republished. In the board meeting held on March 29, 2011, the IASB determined not to issue an ED until the FASB issues its ED and receives feedback.
This project is not included as an active project in the IASB work plan as of March 2012.

7. Criteria for classification as non-current assets held for sale
US GAAP
IFRS
The following criteria must be met for a non-current asset (disposal group) to be classified as held for sale:
The assets are available for immediate sale in their present condition.
Management commits to a plan to sell the assets.
Management is actively seeking a buyer.
The sale is probable and will generally occur within one year.
The selling price is reasonable in relation to the
current value.
It is unlikely there will be any significant changes to the plan to sell the assets.
Similar

8. Criteria for classification as non-current assets held for sale
US GAAP
It must be probable the sale will occur within one year.
IFRS
It must be “highly probable” the sale will occur within one year.
IFRS 5, Appendix A, defines highly probable as “significantly more likely than probable.”
IFRS 5.8 lists the criteria for a sale to be highly probable. Other than differences in terminology, there are no significant differences between US GAAP and IFRS.

9. Criteria for classification as discontinued operations
US GAAP
IFRS
A discontinued operation is defined as a component of an entity that is held for sale or has been disposed. The definitions under both standards generally allow the inclusion of major lines of business and major geographic areas of operation.
Similar

10. Criteria for classification as discontinued operations
US GAAP
More broadly defines what qualifies as a discontinued operation and could include asset groups smaller than those allowed under IFRS.
ASC requires that “(a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.”
IFRS
No similar requirement.

11. Criteria for classification as discontinued operations Summary
US GAAP
Component of an entity held for sale or one that has been disposed.
Operations and cash flows can be clearly distinguished.
Operations and cash flows will be eliminated from ongoing operations.
No significant continuing involvement in the operations.
No similar requirement.
IFRS
Component of an entity held for sale or one that has been disposed.
Separate major parts of business or geographic area of operation.
No similar requirement.
A single coordinated disposal plan.
Convergence: Based on tentative decisions to date, the Boards have decided to adopt a common definition as currently defined under IFRS. The Boards have also agreed on certain disclosures required if an entity retains continuing involvement with a discontinued operation after the disposal date.

12. Criteria for discontinued operations example
Example 1 – criteria for classification as a discontinued operation
The Copper Mining Company (CMC) is a fully integrated copper company. CMC has three separate operating segments. The mining segment mines the copper and had revenues of $1.0 billion and a net negative cash flow of $0.2 billion. The industrial segment smelts the copper into ingots and had revenues of $1.2 billion and a net cash flow of $0.2 billion. The distribution segment sells the copper ingots to third parties and had revenues of $1.5 billion and a net cash flow of $0.3 billion.
Management of CMC has received an unsolicited offer from a competitor for its industrial segment, which it believes reflects the fair value of these operations. The competitor wants to complete the purchase in the next three months. CMC’s Board of Directors has authorized management’s plan to immediately sell its industrial segment to this competitor and retain the remaining two segments. As part of the proposed purchase, the competitor requires CMC to agree to process all its copper ore through its smelters for the next five years at a cost of 4 cents per ton. This is slightly less than CMC’s current cost of smelting the ore. The competitor also requires that CMC’s management continues to manage the industrial segment for six months after the sale. This will allow the competitor to hire its own management team to run the smelting operations. As is currently the case, CMC’s distribution segment would then sell the copper ingots to third parties.

13. Criteria for discontinued operations example
Example 1 (continued):
Does CMC’s industrial segment qualify as a discontinued operation under US GAAP? Explain your answer.
Does CMC’s industrial segment qualify as a discontinued operation under IFRS? Explain your answer.

14. Criteria for discontinued operations example
Example 1 solution:
US GAAP:
The requirements for classification of the industrial segment as a non-current asset held for sale have been met as stated in the discussion above. The operations and cash flows of the industrial segment are clearly distinguishable from the rest of the operations. However, it appears CMC will have significant continuing involvement in the operations of the industrial segment after the disposal date. Therefore, this plan would not qualify for accounting as a discontinued operation.

15. Criteria for discontinued operations example
Example 1 solution (continued):
IFRS:
The requirements for classification of the industrial segment as a non-current asset held for sale have been met:
The assets are available for immediate sale in their present condition.
Management has committed to a plan to sell the assets.
It has a buyer.
The sale is probable and likely will occur within one year.
The selling price is reasonable in relation to the current value.
It is unlikely there will be any significant changes to the plan to sell the assets.
The single coordinated plan involves the sale of a component of CMC, which represents a major separate line of business and, therefore, would qualify as a discontinued operation.

16. Valuation of discontinued operations
US GAAP
IFRS
A non-current asset held for sale or a disposal group held for sale should be remeasured at the lower of its carrying value or fair value less selling costs. Any resulting gain or loss will be included in the income or loss of the discontinued operations.
Similar

17. Impact on depreciation
US GAAP
IFRS
Both US GAAP and IFRS specify that assets held for sale should not be depreciated.
Similar

18. Presentation – impact on comparative financial statements
US GAAP
IFRS
Disclosure of relevant information regarding the discontinued operations is required.
Similar

19. Presentation Balance sheet
US GAAP
IFRS
Assets and liabilities of discontinued operations must be shown separately.
Similar

20. Presentation Balance sheet
US GAAP
No specific guidance on whether comparative information needs to be restated.
IFRS
Does not require restatement of comparative information.

21. Balance sheet presentation example
Example 2a – balance sheet presentation example
Company A has met all the requirements for accounting for a discontinued operation under both US GAAP and IFRS in its 2012 comparative financial statements. Indicate the minimum required disclosure for discontinued operations by placing an X in the chart below. If the disclosure is not mandatory, place an NR (not required) in the chart.
US GAAP
IFRS
2012
2011
Cash
Total assets
Total liabilities
Net assets

22. Balance sheet presentation example
Example 2a solution:
Both US GAAP and IFRS require that assets and liabilities of discontinued operations be shown separately on the balance sheet. IFRS does not require restatement of comparative information on the balance sheet. US GAAP does not provide any specific guidance on whether comparative information on the balance sheet needs to be restated.
US GAAP
IFRS
2012
2011
Cash NR
Total assets X
Total liabilities
Net assets

23. Presentation Income statement
US GAAP
IFRS
The results of discontinued operations must be shown separately from continuing operations.
Similar
Comparative information must be restated.
Similar
Revenue, pretax income (loss) and any gain (loss) on remeasurement for discontinued operations must be disclosed.
Similar

24. Presentation Income statement
US GAAP
Requires disclosure of the total tax income related to discontinued operations.
IFRS
Requires disclosure of expenses, income taxes on operations and income taxes on gains (losses) on remeasurement related to discontinued operations.

25. Income statement presentation example
Example 2b – income statement presentation
Using the information from the previous example, indicate the minimum required disclosure for discontinued operations by placing an X in the chart. If the disclosure is not mandatory place an NR (not required) in the chart.
US GAAP
IFRS
2012
2011
Revenue
Expenses
Pretax income
Income tax on operations
Remeasurement gain or loss
Income tax on remeasurement
Net interest income (expense)
Total income taxes

26. Income statement presentation example
Example 2b solution:
Both US GAAP and IFRS require the results of discontinued operations be shown separately from continuing operations on the income statement. Comparative information on the income statement must be restated. Both require disclosure of revenue, pretax income (loss) and gain (loss) on remeasurement for discontinued operations. US GAAP requires disclosure of the total income tax related to discontinued operations. IFRS requires disclosure of expenses, income taxes on operations and income taxes on gains (losses) on remeasurement related to discontinued operations.
US GAAP
IFRS
2010
2009
Revenue X
Expenses NR
Pretax income
Income tax on operations
Remeasurement gain or loss
Income tax on remeasurement
Net interest income (expense)
Total income taxes

27. Presentation Cash flows
US GAAP
IFRS
Cash flow disclosures for discontinued operations are allowed.
ASC requires certain footnote disclosures for discontinued operations that generate continuing cash flows.
Similar, although the footnote disclosures are required for all discontinued operations.

28. Presentation Cash flows
US GAAP
No similar requirement for cash flow disclosures of discontinued operations.
ASC states that “An entity that nevertheless chooses to report separately operating cash flows of discontinued operations shall do so consistently for all periods affected, which may include periods long after sale or liquidation of the operation.”
IFRS
Requires disclosure of “the net cash flows attributable to the operating, investing and financing activities of discontinued operations. These disclosures may be presented in either the notes or on the face of the financial statements.
Restatement of comparative information for prior periods is also required.

29. Cash flows presentation example
Example 2c – cash flows presentation
Using the information from the previous example, indicate the minimum required disclosure for discontinued operations by placing an X in the chart below. If the disclosure is not mandatory, place an NR (not required) in the chart.
US GAAP
IFRS
2010
2009
Cash flows attributable to:
Operating activities
Investing activities
Financing activities
Net cash flows

30. Cash flows presentation example
Example 2c solution:
IFRS requires disclosure of “the net cash flows attributable to the operating, investing and financing activities of discontinued operations. These disclosures may be presented in either the notes or on the face of the financial statements.” Restatement of comparative information for prior periods is also required. US GAAP does not have a similar requirement for cash flow disclosures of discontinued operations.
US GAAP
IFRS
2012
2011
Cash flows attributable to:
Operating activities NR X
Investing activities
Financing activities
Net cash flows

31. Treatment when no longer qualified as a non-current asset held for sale
US GAAP
IFRS
A non-current asset held for sale should be reclassified to assets held and used. The value of these operations should be recorded at the lesser of:
The original carrying amount adjusted for any depreciation (amortization) expense that would have been recognized had the discontinued operation been continuously classified as a continuing operation.
Its current fair value.
Similar except recoverable amount is used instead of fair value.

32. Treatment when no longer qualified as a non-current asset held for sale
US GAAP
Does not specify that revaluations must be considered when determining the original carrying amount. However, since these operations are being valued at the lesser of the adjusted original cost or the current fair value, it is likely to result in the same valuation. Therefore, this difference is not significant.
IFRS
The original carrying amount must also be adjusted for any revaluations had the discontinuing operation been continuously classified as a continuing operation.

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