With a new standard in place governing how to account for discontinued operations, companies attempting to apply the guidance for the first time are finding they have a think a little harder to arrive at the right accounting.
The Financial Accounting Standards Board adopted a new approach for how to define and reflect a discontinued operation in financial statements that took effect in 2015 for calendar-year companies. The standard says a discontinued operation is one that constitutes a major strategic shift and has a major impact on the entity, although the standard doesn’t provide guidance on how to define those terms, says Beth Paul, a partner with PwC. “Now in the first and second quarter, as companies start to dispose of things and apply the standard, they’re pausing to determine if its meets that criteria,” she says. “They’re realizing that bar is significant.”
In some cases companies are finding asset disposals that met the criteria for discontinued operations under the old guidance do not under the new guidance, Paul says. “Some are finding as they go back now to the new literature, they’re determining it’s not a strategic shift that has a major impact,” she says.
That is leading companies to new turf in terms of how to describe disposals that don’t meet the new criteria, says Paul. The standard provides guidance on what companies should disclose about asset disposals that don’t qualify for discontinued operations treatment. That will be important territory for investors, she says, who will not want to lose sight of significant disposals that might have been classified as discontinued operations in the past.
The new standard does not address, however, how companies should explain what’s happening in their business when they have disposals that don’t meet the standard. “If you have an item that would have been a discontinued operation, revenue for all prior periods would exclude or be net of that discontinued operation,” Paul explains. “If today under the new model, you can’t get to discontinued operation, comparing revenue won’t be apples to apples. So you have to think about how you talk about that.”
That leads to consideration of using non-GAAP measures to explain the business, Paul says, which raises its own set of concerns given the Securities and Exchange Commission’s heavy focus on assuring companies don’t abuse non-GAAP measures to mislead investors. “Some transactions won’t get to discontinued operations, so companies are thinking about non-GAAP,” she says. “If you do that, you have to use caution because there are SEC rules around the prominence of disclosures of non-GAAP measures.”