Discontinued operation

Discontinued-operation presentation is narrower than “something the company stopped doing.” Apply three conditions in order. The activity must be a component whose operations and cash flows can be distinguished. The component must have been disposed of or meet the applicable held-for-sale criteria. Its disposal must also represent a strategic shift that has or will have a major effect on the entity's operations and financial results.

Closing one warehouse, selling an individual machine, dropping a minor product, or losing a customer can be economically important without meeting that presentation model. Such events can still affect continuing operations, impairment, exit costs, segment information, cash flows, and disclosures.

Apply the conditions in order

For a proposed component, identify the products or services, customers, employees, assets, liabilities, revenue, expenses, cash flows, and internal reports that establish its boundary. Shared systems or employees do not by themselves prevent an activity from being a component, but a label alone does not establish one.

Next, establish the disposal status as of the reporting date. A completed sale or abandonment satisfies that condition. A planned sale satisfies it only when the component meets every applicable held-for-sale criterion. Board approval alone does not complete that analysis.

Finally, compare the entity before and after the disposal. Leaving a major product line, market, or geographical area may represent a strategic shift with a major effect. Selling one machine or closing one of many similar locations usually does not. US GAAP provides examples, not a percentage cutoff.

If the disposal does not qualify, report its recognized results in continuing operations and apply the relevant disposal, measurement, and disclosure rules. If it qualifies, present the discontinued-operation result separately from income from continuing operations and net of its allocated income tax effect. The company also recasts the qualifying component's results for comparative periods shown.

ASC 205-20-45-1A through 45-1C set the component, disposal, and strategic-shift conditions. ASC 205-20-45-1E supplies the held-for-sale criteria for a component being evaluated for discontinued-operation presentation. Current codified guidance, rather than the original Accounting Standards Update, controls the conclusion.