FAR - UPDATE: Discontinued Ops /Disposal Flashcards Preview

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Flashcards in FAR - UPDATE: Discontinued Ops /Disposal Deck (16):

US GAAP / IFRS - Held for Sale

US GAAP use the term component of _____

IFRS use _____ group

US GAAP / IFRS - Held for Sale

US GAAP use the term component of BUSINESS



IFRS/US GAAP - Held for sale

Must meet the 6 criteria - what are they?

(1) Management commits to plan to sell discontinued ops

(2) Component / ops is available for IMMEDIATE SALE in its present condition

(3) An active program to locate buyer has begun

(4) The sale of component is PROBABLE and the sale is expected to complete in 1 year. (Limited exception to this 1 year rule when dealing with company's circumstances that are beyond the company's control

(5) Actively marketing/promoting the sale on component

(6) Actions required to complete the sale make it UNLIKELY that signification changes to the lan will be made or the lan will be withdrawn. Other words, actions to finish the sale does not result in changing the plan or withdrawing the plan.


When you report an component in the discontinued operations?

(1) when it's been actually disposed of


(2) it's classified as held for sale.

This applies for Company's component, or company's group of components, or non-profit's activity going to be disposed of or listed as held for sale (be disposed later).


Conditions that must be present

(1) Related costs to disposal is recognized when_____.

(2) Report in disconnected operations when disposal represents a _____ or will have a ____.

(1) when obligations to others exists, not necessary in period of committing to a plan to dispose component

(2) when disposal represents a STRATEGIC SHIFT or will have a MAJOR EFFECT on company/entity's OPERATIONS and FINANCIAL RESULTS.


Name 3 examples on strategic shift that could have major effect on operations and financial results.

* Disposal of Major Geographic Area
* Disposal Major equity method investment
* Dispose major business line


A business or non-profit that on acquisition meets criteria to be "held for sale" is considered as _____.

Discontinued operations.


Am-Serv, Inc. is a food service company that delivers frozen food products to food service providers. Their clients include fast-food restaurants, high-end steak houses, home-delivery diet food companies, and institutions such as schools and hospitals. Historically, the fast-food restaurants have been the largest segment of Am-Serv's business in terms of revenue and operating profit. However, that division is now forecasted to begin to decline in revenues because the public is looking for healthier options. Am-Serv has decided to sell its fast-food operation, and instead focus on selling to locally-operated restaurants offering a healthier fare. Such restaurants will generally show lower revenue per unit, but higher operating profit per unit. Because the fast-food division is the largest component in terms of revenue and operating profit, discontinued operation.

Where in this example show that there is a strategic shift involve to report a Discontinued Operations on Income Statement?

"Historically, the fast-food restaurants have been the largest segment of Am-Serv's business in terms of revenue and operating profit."

"However, that division is now forecasted to begin to decline in revenues because the public is looking for healthier options."

" Am-Serv has decided to sell its fast-food operation, and instead focus on selling to locally-operated restaurants offering a healthier fare."

Change in strategic shift:
(1) Have a business segment in operations for many years
(2) Sell it off to focus on something else - here: it's sell Fast-food division in order to shift focus on Locally-operated restaurants selling Healthy food.


Types of Items Included in Results of Discontinued Operations

Types of Items Included in Results of Discontinued Operations:

a. Results of operations of the component.
b. Gain or loss on Disposing the component.
c. include impairment loss (and subsequent increases in fair value) of the component.

(1) Initial and Subsequent Impairment Losses
A loss is recognized for recording the impairment of the component (i.e., any initial or subsequent write-down to fair value less costs to sell).

Other words: Record any impairment loss on component (right away) on initial (starting) impairment loss + later impairment losses.

(2) Subsequent Increases in Fair Value
A gain is recognized for any subsequent increase in fair value minus the costs to sell (but not in excess of the previously recognized cumulative loss).

[Other words: Subsequent/later Fair value increases --> Gain = Fair Value - Costs to sell]


Report in the Period Disposed or Held for Sale

What does this mean when dealing with reporting operations (revenues - expenses) on the Discontinued ops?

Report operations (revenues - expense = net results) in Discontinued operations

Either when it's being held for sale
When it's disposed / sell off.

Later years/periods operations results of "held-for-sale" classified Componet are reported when they incur.
Other words, here's "held-for-sale" component in later years
- Operating results (income / losses) incur in year 4 = report only in year 4
- Operating results (income / losses)later incur in year 5 = only report in year 5
- Operating results (income / losses)later incur in year 6 = only report in year 6

There is no reporting year 4 results in year 5, year 6 and vice versa.


Depreciation - Amortization: how are they handled for assets in the component being "held for sale" or "disposed?"

No Depreciation (fixed assets) or Amortization (intangible assets) on component being held for sale or disposed.


Anticipated (expected) future gains or losses

how are they treated for discontinued operations?

Gain / loss not previously recognized in prior years are Reported/recognized on Sale Date (not before Sale date).

Gain / losses expected in future = recognized in the future as they occur. Do not recognize them ahead of time in current income statement for discontinued operations. Report them when they happened.


Subsequent Adjustments to Amounts Previously Reported

Adjustments to amounts previously reported in discontinued operations that are directly related to the disposal of a component of an entity in a prior period are classified in the current period in discontinued operations.

What does this mean?

Give some examples.

This means any Adjustments need to be made to already-reported items in Discontinued operations

= Report these adjustments in Current Period in Discontinued operations (other words: Report them on Current Income statement's Discontinued operations).


a. Resolution of contingencies related to terms of the disposal transaction (e.g., Purchase price Adjustments and indemnification issues).

b. Resolution of Contingencies directly related to the operations of the component before it was disposed of (e.g., warranty obligations and environmental responsibilities).

c. Settlement of Employee Benefit Plan obligations.


What does "Directly related" mean for a settlement to be considered related to the (to-be-discontinued) component of entity/company?

a. Have a demonstrated Cause-and-Effect relationship,


b. Settlement Occur NO later than one year After the Date of the disposal transaction (unless circumstances beyond the control of the entity exist).

(Other words, settlement occur 1 year later or less than 1 year later after actually Disposing the component (date)


"Held for sale" components (disposal groups - IFRS)

are measured at ______.

What are costs to sell (selling costs) on disposing a component?

Lower of its Carry value

or Fair value minus selling costs

Costs to sell (selling costs) = incremental direct costs to transact the sale. Costs to help make the sell final.


How are Discontinued Operations are presented and disclosed on income statement?

Disctoninued oeprations results, net of tax

Reproted as "Separate" component of income before extraordinary item."


income statement
Ending on 12/31/20XX

Income from Continued Operations
Income from Discontinued operations, net of tax
Extraordinary item, net of tax
Effect Of Accounting Changes


Per IFRS - US GAAP convergence - Need to report Liability on Disposal / Exit costs on activity

(1) What are Exit and Disposal costs (3 items)?

(2) What is the criteria to recognize Liability on Disposal/Exit costs on activity?

(3) how are future operating losses (part of Exit/Disposal activity) expected to incur are reported?

(1) Exit and Disposal Costs = costs associated with selling off the component that includes
(a) Involuntary employee termination benefits = paying employees money (severance pay) before laying them off

(b) Costs to terminate a contract (not a capital lease contract)

(c) Other costs, such as consolidate facilities and/or relocate employees.

(2) Criteria to recognize liability on Disposal/Exit costs:
(a) Obligating event occurred
(b) Obligating event occurring results in = Transfer assets or Provide Services in the future

(c) Company has little or no control / discretion to stop the transfer asset or provide services

(3) Future operating losses (part of Exit/Disposal) = Report them in the periods that occur (report them when they happen in future periods).

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