ASC Insight Series

ASC 205-20, Presentation of Financial Statements — Discontinued Operations

22, August 2024

Purpose

The Financial Accounting Standards Board’s (FASB’s), ASC 205-20, Presentation of financial statements -Discontinued operations (‘ASC 205-20’) provides comprehensive guidance on the reporting and presentation of discontinued operations in financial statements. ASC 205-20 is a critical tool for financial professionals, preparers, auditors, and users of financial statements, offering detailed guidelines on the identification, measurement, and disclosure of discontinued operations.

This publication provides an overview of the requirements, implementation matters, and key considerations related to ASC 205-20. The technical views and accounting positions on the framework keep enhancing depending on carrying out further technical evaluations and their outcomes.

The need for a discussion on the topic of discontinued operations arises from changes in businesses consequent to the COVID-19 pandemic, changes due to focus on environmental considerations, complex accounting and reporting structures and revamping of businesses to requirements of changing times.

As the business environment continues to evolve, so does the need for robust financial reporting standards. Separate reporting of discontinued operations enables financial statements users to understand and evaluate the effects of a disposal transaction on the ongoing operations of an entity and ultimately contributing to a more informed decision-making process for investors, creditors, and other stakeholders.

Background

ASC 205, Presentation of Financial Statements, prescribes authoritative guidance for the presentation of financial statements for all the entities reporting under US GAAP accounting framework. Subtopic ASC 205-20 provides guidance on the presentation and disclosure of discontinued operations, including criteria for determining when the presentation of discontinued operations is appropriate.

It provides a 3-step process for determining when and how to report and disclose discontinued operations.

Summary of Topic

Scope

EA discontinued operation includes either:

Disposal Transaction:

A component of an entity or group of components that is classified as held-for-sale or have been disposed of by sale or disposed of other than by sale or and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.

Newly acquired business:

A newly acquired business or nonprofit activity that, on acquisition, met the held-for-sale criteria.

Criteria for reporting discontinued operations

Subtopic ASC 205-20 requires all reporting entities to separately present discontinued operations from continued operations in financial statements, as a single amount in the statement that reports profit or loss. An analysis of this single amount is presented either in the statement that reports profit or loss or in the notes to financial statements. Further, in the Statement of Financial Position for discontinued operations classified as held for sale and for all prior periods presented, the assets and liabilities of the discontinued operation shall be presented separately.

To report any operations under this sub-topic, it is required to meet the definition of Discontinued Operations. Subtopic ASC 205-20 provides guidance on the determination of discontinued operations.

To read the summary on Subtopic ASC 205-20 providing guidance on the determination of discontinued operations, download the pdf.

Key Issues/Considerations

Evaluating a group of components in a single plan of disposal for a strategic shift

Allocation of goodwill to a disposal group

To read the full report, download the pdf.

Disclosure requirements

An entity may elect to provide certain information either on the face of the financial statements or in the notes. The disclosure requirements in Subtopic 205-20 for discontinued operations vary depending on the type of operation being disposed of:

Income statement

The current and prior period results of operations of the component, which meets the criteria of discontinued operations, are presented separately. Further, expenses that are expected to continue in the ongoing entity after the disposal date should be reported within continuing operations and generally, should not be allocated to discontinued operations.

A gain or loss recognized on the disposal or loss recognised on classification of held for sale should also be included in discontinued operations line in the income statement. The gain or loss should be presented separately on the face of the income statement or disclosed in the notes to the financial statements.

Adjustments to previously reported amounts in discontinued operations in a prior period (such as, resolution of contingencies that arise pursuant to the terms of the disposal transaction) should be classified separately in the current period discontinued operations along with a disclosure of the nature and amount of such adjustments.

Earnings per share

Entities that report discontinued operations are required to present basic and diluted per-share amounts for that line item either on the face of the statement of operations or in the notes to the financial statements in accordance with the requirements of ASC 260-10-45-3.

Statement of financial position

In the period that a discontinued operation meets the criteria to be classified as held for sale, and for all prior periods presented, the assets and liabilities of the discontinued operation should be presented separately in the asset and liabilities sections, respectively, in the statement of financial position.

Key Issues/Considerations

Reporting and presentation requirement of discontinued operations for prior periods

Presentation of Intercompany transactions that occur before disposal.

Comparison with IFRS

Both ASC 205-20, Presentation of Financial Statements — Discontinued Operations under USGAAP and IFRS 5, Non-current Assets Held for Sale and Discontinued Operations under IFRS, provide guidance on reporting of discontinued operations. This enables the financial statements users to understand and evaluate the effects of a disposal transaction on an entity’s ongoing operations.

The following table summarizes the key differences:

Authors

Sandip Khetan, Co-Founder, Global Head of Accounting & Reporting Consulting

Avinash Ramkumar, Partner, Accounting & Reporting Consulting

Akash Loonia, Partner, Accounting & Reporting Consulting

Ashish Gupta, Partner, Accounting & Reporting Consulting

Sharad Chaudhry, Partner, Accounting & Reporting Consulting

Sagar Lakhani, Partner, Accounting & Reporting Consulting

Purvi Shah, Director, Accounting & Reporting Consulting

Puneet Chowdhary, Director, Accounting & Reporting Consulting

Etisha Singh, Associate Director, Accounting & Reporting Consulting

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