WEBVTT NOTE session-07 1 00:00:00.000 --> 00:00:13.742 Granite Harbor sold its entire hardware line on October 31, 2025. Where does that result go on the income statement, and how much of it appears? That is Session 7. 2 00:00:13.742 --> 00:00:25.967 We will classify a disposal with three conditions, measure the result with a supplied tax allocation, and present it in the financial statements. 3 00:00:25.967 --> 00:00:44.467 Objective 2.2a is classification. Given a disposal, you decide whether it qualifies as a discontinued operation, and you keep it apart from an unusual or infrequent item that stays in continuing operations. 4 00:00:44.467 --> 00:01:01.767 Objective 2.2b is presentation. Given supplied amounts, you place a discontinued operation on the income statement, net of tax, and show its held-for-sale assets and liabilities on the balance sheet. 5 00:01:01.767 --> 00:01:18.182 Why separate any disposal at all? Readers use income from continuing operations to judge the business that remains. If the threshold is too high, a major business that is leaving stays mixed into that subtotal. 6 00:01:18.182 --> 00:01:30.611 If the threshold is too low, routine asset sales, site closures, and weak operations slide below the line and the remaining subtotal looks stronger than it is. 7 00:01:30.611 --> 00:01:41.867 The rule separates a major business that is leaving and keeps ordinary consequences of managing the remaining business in continuing operations. 8 00:01:41.867 --> 00:01:50.300 Part 1 is classification. Three conditions, applied in order, and you stop at the first no. 9 00:01:50.300 --> 00:02:10.196 Here is the decision path. First, can the component's operations and cash flows be distinguished from the rest of the entity? Second, has the component been disposed of, or is it classified as held for sale? 10 00:02:10.196 --> 00:02:28.457 Third, does the disposal represent a strategic shift with a major effect? A no on any question sends the result to continuing operations. Three yes answers put it in discontinued operations. 11 00:02:28.457 --> 00:02:33.167 The source is ASC 205-20-45-1B, 45-1C, and 45-1E. 12 00:02:33.167 --> 00:02:44.652 Condition 1 needs two kinds of evidence. Operating evidence is separate products, customers, employees, facilities, or management information. 13 00:02:44.652 --> 00:02:54.196 Reporting evidence is records that let you distinguish the component's operations and cash flows from everything else. 14 00:02:54.196 --> 00:03:11.100 The boundary matters because removing visible revenue while leaving shared costs and cash flows behind distorts both sections. A management label or a separate legal entity does not prove a complete carve-out. 15 00:03:11.100 --> 00:03:29.116 Think of the evidence in three stages. A label alone, such as calling an activity a division, establishes nothing. Separate revenue identifies some activity, but costs and cash flows may still be mixed. 16 00:03:29.116 --> 00:03:40.800 Dedicated operations plus reconciled records can distinguish both operations and cash flows, and that is what condition 1 requires. 17 00:03:40.800 --> 00:03:58.301 Condition 2 has three outcomes. If the disposal is complete, move on to the strategic-shift judgment. If a sale is planned and all six held-for-sale criteria are met, classify the component as held for sale and move on. 18 00:03:58.301 --> 00:04:09.568 If a sale is planned and even one criterion fails, the component is not held for sale and the whole component stays in continuing operations. 19 00:04:09.568 --> 00:04:17.000 A plan alone is not enough; all six criteria must support sale as the expected recovery path. 20 00:04:17.000 --> 00:04:32.504 The six criteria, in order. Management with authority commits to a plan to sell. The component is available for immediate sale in its present condition. An active program to find a buyer has begun. 21 00:04:32.504 --> 00:04:45.333 The sale is probable within one year, subject to limited exceptions. The component is actively marketed at a price reasonable compared with its current fair value. 22 00:04:45.333 --> 00:04:55.800 And a major change to the plan, or its withdrawal, is unlikely. Use these only after you have a component whose sale is not complete. 23 00:04:55.800 --> 00:05:09.870 Condition 3 asks two questions. What leaves the company: a major product or service line, a major customer group or market, a major geographical area, or another major part of the entity? 24 00:05:09.870 --> 00:05:18.597 And how important is the exit, measured by its effect on operations and financial results? Both answers must be yes. 25 00:05:18.597 --> 00:05:32.667 A large loss without a strategic exit can still be an ordinary cost of managing the continuing business. Compare the business before and after the disposal. There is no percentage cutoff. 26 00:05:32.667 --> 00:05:46.927 First question. A company plans to sell one business operation. Which fact most directly supports that it is a component? A, management calls it a division. 27 00:05:46.927 --> 00:06:02.833 B, its records distinguish the operation's activities and cash flows. C, the expected sale price exceeds carrying amount. D, the sale is expected within one year. Choose one. 28 00:06:10.833 --> 00:06:23.790 The answer is B. Records that distinguish the activity's operations and cash flows are the operating and reporting evidence condition 1 requires. A label proves nothing. 29 00:06:23.790 --> 00:06:36.133 The sale price above carrying amount is a measurement fact. A sale expected within one year belongs to the held-for-sale analysis, not to the component question. 30 00:06:36.133 --> 00:06:49.481 Now the Granite Harbor facts. The company continues to make and sell cabinets. A separate plant and workforce made hinges, pulls, and drawer slides for outside customers. 31 00:06:49.481 --> 00:07:03.615 Monthly profit-and-loss and cash-flow schedules for the line reconciled to the general ledger. Granite Harbor sold the entire line on October 31, 2025, and stopped making hardware. 32 00:07:03.615 --> 00:07:18.533 The line produced 29.5 million dollars of the company's 147.5 million dollars in sales. Take 5 minutes in your group. Decide whether each condition is met and name the fact that controls it. 33 00:07:28.533 --> 00:07:39.926 Condition 1 is met. The separate plant, workforce, customers, and reconciled schedules distinguish the line's operations and cash flows. 34 00:07:39.926 --> 00:07:49.643 Condition 2 is met because the October 31 sale was completed, so the six held-for-sale criteria are not needed here. 35 00:07:49.643 --> 00:08:00.533 That leaves the third question: does removing the hardware line represent a strategic shift with a major effect on Granite Harbor? 36 00:08:00.533 --> 00:08:12.718 Yes on both parts. Before the sale, Granite Harbor made cabinets and hardware. After the sale, it makes only cabinets, so a major product line has left. 37 00:08:12.718 --> 00:08:24.181 The sale removes the hardware plant, the workforce, the products, and the outside customers, and the line produced 20 percent of company sales. 38 00:08:24.181 --> 00:08:36.767 All three conditions are met, so the hardware-line results go in discontinued operations. The 20 percent supports the conclusion; it is not a cutoff in GAAP. 39 00:08:36.767 --> 00:08:46.284 Second question, and a different Granite Harbor scenario. The company closes one regional showroom and sells its equipment. 40 00:08:46.284 --> 00:08:59.128 The showroom has separate staff and records, but Granite Harbor keeps selling the same cabinets through five other showrooms. Where does the showroom's result belong? 41 00:08:59.128 --> 00:09:11.663 A, continuing operations because the disposal is not a strategic shift with a major effect. B, continuing operations because a completed disposal never qualifies. 42 00:09:11.663 --> 00:09:21.567 C, discontinued operations because the showroom has separate records. D, discontinued operations because the equipment was sold. 43 00:09:31.567 --> 00:09:48.043 The answer is A. Walk the three conditions. Component? Yes, the separate staff and records distinguish its operations and cash flows. Disposal status? Yes, the showroom was closed and its equipment sold. 44 00:09:48.043 --> 00:10:04.600 Strategic shift with a major effect? No. Granite Harbor still sells the same cabinets through five other showrooms. The third condition fails, so the entire showroom result stays in continuing operations. 45 00:10:04.600 --> 00:10:18.867 Part 2 is measurement and presentation. Combine the component's operating and disposal results, apply the supplied tax allocation, and place the result in the statements. 46 00:10:18.867 --> 00:10:22.269 A discontinued operation has two pieces. 47 00:10:22.269 --> 00:10:37.835 The operating result is the component's income or loss through the earlier of the disposal date or the reporting date; those results arose while the company still owned the component. 48 00:10:37.835 --> 00:10:48.808 The disposal result is the gain or loss on a completed sale, or a held-for-sale write-down; that amount captures the exit itself. 49 00:10:48.808 --> 00:11:01.567 Add the signed operating result and the signed disposal result, and you have the pretax discontinued-operation result. The source is ASC 205-20-45-3A. 50 00:11:01.567 --> 00:11:14.780 Tax stays with the section that produced it. A continuing item is reported before tax, and its tax effect stays in the continuing-operations tax line. 51 00:11:14.780 --> 00:11:25.526 A discontinued operation is reported net of tax, using the tax expense or benefit the problem supplies for that component. 52 00:11:25.526 --> 00:11:34.775 Because the tax is allocated between the two sections, the after-tax sections add directly to net income. 53 00:11:34.775 --> 00:11:47.900 One caution: pretax financial-reporting income is not necessarily taxable income, so use only the supplied tax amount. The source is ASC 740-20-45-2. 54 00:11:47.900 --> 00:12:00.273 Your turn, 5 minutes on your own. The hardware line had a 1.25 million dollar operating loss through October 31, with a supplied 250,000 dollar tax benefit. 55 00:12:00.273 --> 00:12:14.708 Granite Harbor also recognized a 2.5 million dollar loss on the completed sale, with a supplied 500,000 dollar tax benefit. Treat income and gains as positive and losses as negative. 56 00:12:14.708 --> 00:12:28.033 Calculate the pretax loss and the net-of-tax loss, then show where the result sits in the income statement. The classification work is already done; the line qualifies. 57 00:12:40.033 --> 00:12:52.108 Two stages. The 1.25 million dollar operating loss plus the 2.5 million dollar loss on sale gives a 3.75 million dollar pretax loss. 58 00:12:52.108 --> 00:13:03.452 The supplied tax benefits of 250,000 and 500,000 dollars total 750,000 dollars, which reduces the loss to 3 million dollars. 59 00:13:03.452 --> 00:13:12.233 That 3 million dollar net loss from discontinued operations is the amount the statement carries. 60 00:13:12.233 --> 00:13:35.794 Third question. A qualifying disposal has a 600,000 dollar pretax loss and a supplied 150,000 dollar tax benefit. What net loss is reported in discontinued operations? A, 150,000 dollars. B, 450,000 dollars. 61 00:13:35.794 --> 00:13:40.233 C, 600,000 dollars. D, 750,000 dollars. 62 00:13:48.233 --> 00:14:01.404 The answer is B, 450,000 dollars. A tax benefit reduces a loss: 600,000 minus 150,000 is 450,000. Choice A is the tax benefit itself. 63 00:14:01.404 --> 00:14:18.733 Choice C is the pretax loss, but discontinued operations is presented net of the allocated tax. Choice D adds the benefit to the loss, and a benefit never makes a loss larger. 64 00:14:18.733 --> 00:14:35.291 Here is the placement. Income before income taxes is 25 million dollars. Income tax expense on continuing operations is 5 million, so income from continuing operations is 20 million dollars. 65 00:14:35.291 --> 00:14:53.591 Below that line come the two hardware-line pieces. The operating loss, net of its 250,000 dollar tax benefit, is 1 million dollars. The loss on sale, net of its 500,000 dollar tax benefit, is 2 million dollars. 66 00:14:53.591 --> 00:15:03.700 Together, the loss from discontinued operations, net of tax, is 3 million dollars. Net income is 17 million dollars. 67 00:15:03.700 --> 00:15:16.946 Once the hardware line is a discontinued operation, the 2024 column changes too. As reported, 2024 showed 18 million dollars from continuing operations. 68 00:15:16.946 --> 00:15:31.760 Recast, it shows 16 million from continuing operations and 2 million dollars from discontinued operations, net of tax, the hardware-line income the prior lesson supplied. 69 00:15:31.760 --> 00:15:47.532 Both years must draw the boundary of the continuing business in the same place; otherwise 2025 would exclude hardware while the 2024 comparison still included it. Placement changes. 70 00:15:47.532 --> 00:15:51.367 2024 net income stays at 18 million dollars. 71 00:15:51.367 --> 00:16:00.942 The full comparative statement. Net sales are 118 million dollars in 2025 and 100 million dollars in 2024, recast. 72 00:16:00.942 --> 00:16:11.526 Cost of goods sold is 70 million dollars and 60 million dollars, so gross profit is 48 million dollars and 40 million dollars. 73 00:16:11.526 --> 00:16:29.165 After selling and administrative expenses, operating income is 26 million dollars and 20 million dollars. In 2025 there is a gain on the sale of a van of 2 million dollars and a flood loss of 2 million dollars. 74 00:16:29.165 --> 00:16:44.789 In 2024 there is a gain on the sale of land of 2 million dollars. Interest expense is 1 million dollars and 2 million dollars. Pretax income is 25 million dollars and 20 million dollars. 75 00:16:44.789 --> 00:17:03.184 Tax is 5 million dollars and 4 million dollars, and continuing income is 20 million dollars and 16 million dollars. Discontinued operations is a loss of 3 million dollars in 2025 and income of 2 million dollars in 2024. 76 00:17:03.184 --> 00:17:15.700 Net income is 17 million dollars and 18 million dollars. Every line above the discontinued result describes the cabinet business only, in both years. 77 00:17:15.700 --> 00:17:21.786 When long-lived assets qualify as held for sale, two rules apply. 78 00:17:21.786 --> 00:17:38.357 Measure them at the lower of carrying amount or fair value less cost to sell: write them down if the sale value is lower, and never record an initial gain above carrying amount. 79 00:17:38.357 --> 00:17:49.311 And stop depreciating them on the classification date, because recovery is now expected through sale rather than use. 80 00:17:49.311 --> 00:18:07.100 In a disposal group, measure the other assets and liabilities under their own guidance first, then apply this rule to the long-lived assets. The source is ASC 360-10-35-39, 35-40, and 35-43. 81 00:18:07.100 --> 00:18:20.891 Work with a partner for 5 minutes. Granite Harbor plans to sell its Western outdoor-cabinetry division, which qualifies as held for sale and as a discontinued operation. 82 00:18:20.891 --> 00:18:32.233 The division's only assets are long-lived assets with a 620,000 dollar carrying amount and 690,000 dollars of fair value less cost to sell. 83 00:18:32.233 --> 00:18:39.006 Related liabilities of 140,000 dollars keep their amounts under their own guidance. 84 00:18:39.006 --> 00:18:56.388 The controller proposes to increase the assets to 690,000 dollars, stop their depreciation, and present one 550,000 dollar net held-for-sale asset. Evaluate the measurement, the depreciation, and the presentation. 85 00:18:56.388 --> 00:18:59.733 Correct each part you reject and say why. 86 00:19:11.733 --> 00:19:29.220 Two of the three parts fail. Measurement: report the long-lived assets at 620,000 dollars, the lower amount. The 70,000 dollar excess is not an initial gain. The liabilities keep their own measured amounts. 87 00:19:29.220 --> 00:19:47.217 Depreciation: stopping it is correct, because the recovery path changed from use to sale. Presentation: report 620,000 dollars of held-for-sale assets and 140,000 dollars of related liabilities on separate lines. 88 00:19:47.217 --> 00:19:49.933 Do not net them into one amount. 89 00:19:49.933 --> 00:20:15.173 Here is the full balance sheet at December 31, 2026, in thousands of dollars. On the asset side, assets held for sale appear as their own line at 620, inside total current assets of 3,999, and total assets are 7,794. 90 00:20:15.173 --> 00:20:30.947 On the other side, liabilities held for sale appear at 140, inside total current liabilities of 1,760, and total liabilities are 3,745. 91 00:20:30.947 --> 00:20:53.967 One 480,000 dollar net amount would hide both the 620,000 dollars of resources expected to be sold and the 140,000 dollars of obligations attached to them. The source is ASC 205-20-45-10 and 45-11. 92 00:20:53.967 --> 00:21:11.757 When Granite Harbor shows 2025 beside 2026, both columns use separate Western Division asset and liability lines. In 2026 the assets stay at 620 because the sale value is higher, and no initial gain is recorded. 93 00:21:11.757 --> 00:21:28.367 In the 2025 column, the amounts are the ones recognized at December 31, 2025. The 2026 measurement is not applied backward. Same presentation in both columns; each column keeps its own measurement. 94 00:21:28.367 --> 00:21:38.302 The statements give a reader the after-tax discontinued-operation total and the separate held-for-sale asset and liability totals. 95 00:21:38.302 --> 00:21:53.433 The note is where the reader learns which business is leaving and why, how the totals were built, what resources and obligations are going, and whether any relationship continues after the disposal. 96 00:21:53.433 --> 00:22:13.559 The disclosure areas fall into four groups. The disposal: which business, the facts and timing, and why the company acted. Results: operating results, disposal gains or losses, and income tax effects. 97 00:22:13.559 --> 00:22:34.690 Assets and liabilities: the major classes leaving and their statement amounts. And cash flows and continuing involvement. These are categories, not a reading procedure, and some apply only when the facts exist. 98 00:22:34.690 --> 00:22:41.633 The source is ASC 205-20-50-1, 50-4A, 50-4B, and 50-5B through 50-5D. 99 00:22:41.633 --> 00:23:00.457 Fourth question. A component first qualifies as held for sale in 2026, and the company presents comparative 2025 and 2026 balance sheets. How should it present the component's 2025 assets and liabilities? 100 00:23:00.457 --> 00:23:16.420 A, leave the 2025 lines unchanged. B, use separate 2025 lines and apply the 2026 write-down to both years. C, use separate 2025 lines but keep the December 31, 2025 amounts. 101 00:23:16.420 --> 00:23:22.233 D, combine the 2025 assets and liabilities into one net amount. 102 00:23:30.233 --> 00:23:39.673 The answer is C. The 2025 change is presentation only: separate lines, with the amounts measured at December 31, 2025. 103 00:23:39.673 --> 00:23:48.393 Leaving the lines unchanged fails because comparative presentation uses separate lines in every period shown. 104 00:23:48.393 --> 00:24:05.433 Applying the 2026 write-down backward fails because a later measurement does not change amounts measured at an earlier date. And the balance sheet never offsets the disposal group's assets against its liabilities. 105 00:24:05.433 --> 00:24:21.667 Part 3 is a separate presentation issue. Unusual or infrequent items stay inside continuing operations. A company can make a material one visible on the statement or explain it in the notes. 106 00:24:21.667 --> 00:24:39.545 Two judgments, each made in the entity's own environment. Unusual nature asks whether the event is highly abnormal and unrelated, or only incidentally related, to the entity's ordinary activities. 107 00:24:39.545 --> 00:24:49.214 Infrequency asks whether this type of event is not reasonably expected to recur in the foreseeable future. 108 00:24:49.214 --> 00:25:06.909 Look at what the company normally does, where it operates, whether similar events have happened, and whether another is reasonably expected. An item can be unusual, infrequent, both, or neither. 109 00:25:06.909 --> 00:25:10.467 The source is ASC 220-20-55-1 and 55-2. 110 00:25:10.467 --> 00:25:28.176 Two presentation approaches, and both stay in continuing operations, before tax. A company can name the material item on its own income-statement line when that helps readers see its nature and financial effect. 111 00:25:28.176 --> 00:25:39.758 Or it can include the amount in an ordinary continuing-operation line and use a note to identify the event, the amount, and where it sits. 112 00:25:39.758 --> 00:25:50.333 Neither choice creates a discontinued operation, and neither changes how the event is measured. The source is ASC 220-20-45-1. 113 00:25:50.333 --> 00:26:03.888 Here is a real example from Qurate Retail, the parent of QVC. On December 18, 2021, a fire destroyed QVC's Rocky Mount fulfillment center in North Carolina. 114 00:26:03.888 --> 00:26:17.096 In 2022, the note reports 157 million dollars of fire-related costs, including a 95 million dollar inventory write-down that sits in cost of goods sold. 115 00:26:17.096 --> 00:26:34.213 In 2023, QVC received 280 million dollars of insurance proceeds and recognized net gains of 208 million dollars in a line called restructuring, penalties, and fire-related costs, net of recoveries. 116 00:26:34.213 --> 00:26:47.333 The filed XBRL groups this disclosure under unusual or infrequent items, or both. The note tells you which continuing-operation lines hold the amounts. 117 00:26:47.333 --> 00:27:04.397 Last question. The filing's XBRL classifies the fire disclosure as unusual or infrequent, and the note identifies amounts in cost of goods sold and in another continuing-operation line. 118 00:27:04.397 --> 00:27:20.631 What does that presentation demonstrate? A, a material event must be reported net of tax. B, a note can identify the nature, amount, and location of a material continuing item. 119 00:27:20.631 --> 00:27:31.700 C, a fire automatically qualifies as a discontinued operation. D, every fire-related amount must use one statement line. 120 00:27:39.700 --> 00:27:51.452 The answer is B. QVC's note explains which continuing-operation lines contain the fire-related amounts and supplies detail the statement alone cannot. 121 00:27:51.452 --> 00:28:05.632 Choice A is wrong because continuing items appear before the continuing tax line. Choice C is wrong because the type of event does not satisfy the discontinued-operation conditions. 122 00:28:05.632 --> 00:28:11.900 Choice D is wrong because the note traces related effects to more than one line. 123 00:28:11.900 --> 00:28:27.390 Two different questions, so keep them apart. For a disposed or held-for-sale component, ask whether all three conditions are met. Yes means below continuing operations, net of allocated tax. 124 00:28:27.390 --> 00:28:38.804 No means continuing operations. For an event inside the continuing business, ask whether it is unusual, infrequent, or both for this entity. 125 00:28:38.804 --> 00:28:51.849 It stays in continuing operations, before tax, and if it is material you present it separately or disclose it. An unusual event is not a discontinued operation. 126 00:28:51.849 --> 00:29:03.833 One moves a business that is leaving out of the subtotal for the business that remains; the other makes an event visible without changing sections. 127 00:29:03.833 --> 00:29:18.086 Next class is Thursday, September 24. The topic is the five-step revenue model applied to customer contracts, and Chapter 8 on the course site is your reference. 128 00:29:18.086 --> 00:29:25.080 The Unit 2 review assignment is due Sunday, September 27, at 11:59 p.m. in D2L.