The FASB recently issued an Accounting Standards Update that should reduce reporting of discontinued operations (disc ops) in some circumstances. The revised standard provides that only the disposal of a part of an entity that has a major effect on operations and financial results must be reported as a disc op. The FASB issued the update in response to assertions by stakeholders that too many disposals of small groups of assets were required to be treated as disc ops. The update narrows the definition of disc ops to disposals of components of an entity that represent strategic shifts. Examples of strategic shifts include disposals of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity.

Under current U.S. GAAP, many disposals—some of which may be routine in nature and not a change in an entity’s strategy—are reported in disc ops. Currently, the disposal of a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group is subject to disc ops presentation. The revision should be helpful to public companies because it will reduce the number of times that they need to recast audited financial statements to reflect disc ops in connection with an offer of registered securities. In this regard, paragraph 13200 of the SEC Division of Corporation Finance’s Financial Reporting Manual explains that such retrospective reclassification of all prior periods to report the results of a component of a company that has been disposed of or classified as held for sale is required, even when a registration statement or proxy statement incorporates by reference annual audited financial statements issued prior to the classification of a component in disc ops.

The update will require additional disclosures about, among other things, the financial results of a disc op as well as disclosures about the financial results of an individually significant component of an entity that does not qualify for disc ops presentation, including the pretax profit or loss attributable to the component for the period in which it is disposed of or is classified as held for sale. In addition, the update expands the disclosures about an entity’s significant continuing involvement with a disc op, including the amount of any cash inflows/outflows from/to the disc op following its disposal and information about a disc op in which an entity retains an equity method investment after the disposal transaction.

The amendments also serve to enhance convergence of U.S. GAAP and International Financial Reporting Standards (IFRS) in that the amendments to the definition of a disc op are similar to the definition contained in IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations.”

The new disc op standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014 and interim periods within that year. It is effective for all other entities in annual periods beginning on or after December 15, 2014 and interim periods beginning on or after December 15, 2015. Early adoption is permitted for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issuance.