Does the disposal leave continuing operations?

Granite Harbor closes a small calibration center and sells its equipment. Management calls the closure a strategic exit and wants the loss below income from continuing operations. The words closed, sold, and strategic do not complete the accounting.

Apply three conditions in order. Stop at the first condition that is not met:

1. The activity is a component whose operations and cash flows can be distinguished from the rest of the entity for operating and reporting purposes.
2. The component has been disposed of or meets the applicable held-for-sale criteria as of the reporting date.
3. The disposal represents a strategic shift that has or will have a major effect on the entity's operations and financial results.

Only a component that meets all three conditions receives discontinued-operation presentation.

Establish the component boundary

Identify the products or services, customers, employees, assets, liabilities, revenue, expenses, cash flows, and internal reports that establish the proposed component's boundary. A component may differ from a legal entity or a single asset.

Suppose the calibration center has its own employees, equipment, customer orders, and monthly profit-and-loss schedule. Those facts support a component conclusion because Granite Harbor can distinguish the center's operations and cash flows.

Establish the disposal status

Granite Harbor completed the center's sale, so the disposal-status condition is met. If the sale were only planned, management would need to apply every held-for-sale criterion as of the reporting date. Board approval would satisfy only one part of that analysis. It would not establish immediate availability, an active buyer search, a probable sale within the required period, a reasonable asking price, or an unlikely plan change.

Evaluate the strategic shift and major effect

Granite Harbor still offers the same calibration service through 24 other centers in the same markets. The closed center produced 2 percent of consolidated revenue. Under these facts, the closure does not represent a strategic shift with a major effect. The analysis stops, and the loss remains in continuing operations. The percentage provides context; it is not a cutoff.

Follow the accounting after classification

If a disposal does not qualify as a discontinued operation, its results and loss do not vanish. Report them in continuing operations and apply any separate asset measurement, disposal, exit-cost, cash-flow, segment, and disclosure requirements.

For a disposal that qualifies, determine:

• the revenues, expenses, gains, losses, and tax effects of the component;
• the current and comparative periods presented;
• the assets and liabilities held for sale or disposed;
• the cash flows and noncash information;
• any continuing involvement or transition services; and
• the income-statement and note presentation.

Combine the component's operating results with any gain or loss recognized on measurement or disposal. Present the discontinued-operation result below income from continuing operations and net of its allocated income tax expense or benefit. Recast the qualifying component's results for comparative periods shown. Do not derive a tax effect from a general tax rate when a case supplies the allocated amount.

State a conditional answer when evidence is missing

Do not present a discontinued-operation amount while the component, disposal-status, strategic-shift, or major-effect evidence remains unresolved. State what fact is missing, the result under each possible answer, and which statement and note amounts would change.

A disposal eliminates 4 percent of revenue and the only product sold in one region. Identify one fact needed to establish the component boundary, one fact needed to establish the disposal status, and one fact needed to judge the major effect on operations and financial results. Neither the percentage nor the product description finishes the analysis.