A client sells a division in March. The income statement either shows one line below continuing operations or it does not, and the choice changes every comparative number above it. Revenue, margins and the trend that lenders read all depend on the classification. The balance sheet changes too: the division's assets and liabilities move into separate lines, and prior periods are recast.
This guide covers the qualifying test, the timing, the presentation and the audit procedures. For the measurement of the held-for-sale group itself, see /us/blog/asc-360-assets-held-for-sale-measurement-and-presentation.
What qualifies as a discontinued operation?
Two conditions must both be met.
- A component is disposed of or held for sale. A component has operations and cash flows that can be clearly distinguished from the rest of the entity, both operationally and for financial reporting. It may be a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group. A group of components can qualify together. The disposal can be a sale, an abandonment or a spin-off. The held-for-sale test uses the six criteria in ASC 360-10-45-9, the same ones used for long-lived assets.
- The disposal is a strategic shift with a major effect on operations and financial results. Examples include disposing of a major geographic area, a major line of business or a major equity method investment.
How large is a major effect?
There are no bright-line thresholds. The ASU 2014-08 examples that qualify as strategic shifts include a product line that is 15% of total revenues, a geographic area that is 20% of total assets, and 200 mall stores whose share of net income fell from a 30% to 40% range to 15%. In each example the entity also changed its strategy. The smaller the component, the stronger the qualitative evidence has to be. Continuing involvement with the buyer does not by itself prevent discontinued operations treatment; it triggers added disclosure.
A business that meets the held-for-sale criteria when it is acquired is also a discontinued operation.
When does the classification start?
For a sale, the assessment is made when the component first meets the held-for-sale criteria. For an abandonment, spin-off or exchange, it is made at disposal. A component that meets the criteria at period end is presented as discontinued even if the sale closes later. If all six criteria are met by March 31, for example with an agreement signed March 1 and a closing on April 30, the March 31 statements present the component as discontinued.
Events after the balance sheet date and before issuance are not considered when assessing the criteria. The entity considers the subsequent events disclosure instead.
How is it presented in the income statement?
The results of the component, net of income taxes, appear as a separate component of income below continuing operations. The gain or loss on disposal, and any loss recognized while held for sale, goes on the face of the income statement or in the footnotes. All periods presented are recast.
Included: costs directly attributable to the component, interest on debt the buyer assumes or that must be repaid from the proceeds, exit costs under ASC 420 that relate to the component, and impairment of the disposal group. Excluded: general corporate overhead, which ASC 205-20-45-9 says is not allocated to discontinued operations. Transition service income and expense stay in continuing operations. The results are shown net of the related income taxes.
An illustration, in dollars:
| Statement line | Amount |
|---|---|
| Income from continuing operations | 800,000 |
| Loss from operations of the component, net of tax benefit of 80,000 | (120,000) |
| Loss on disposal, net of tax benefit of 50,000 | (75,000) |
| Net loss from discontinued operations | (195,000) |
| Net income | 605,000 |
How is interest allocated?
Interest on debt that the buyer assumes, or that must be repaid from the sale proceeds, is allocated to discontinued operations. Allocating other consolidated interest is permitted but not required (ASC 205-20-45-7). If it is allocated, the ratio is based on net assets to be sold, less debt that must be repaid, over total net assets plus consolidated debt other than the excluded items, and the decision is applied consistently to all discontinued operations. In a national firm illustration, a $2,000 loan assumed at 6% and a $1,000 loan repaid at 8%, each for six months, gives direct interest of $60 + $40 = $100. An allocated share of other interest, 18.5% x $4,000 x 6% x 6/12, adds about $22. Total allocated interest is $122.
How is the balance sheet presented?
In the period the component is classified as held for sale and in all prior periods presented, its assets and liabilities are shown separately in the asset and liability sections, and they are not offset into a single amount (ASC 205-20-45-10). The major classes of assets and liabilities are presented on the face or disclosed in the notes, and the disclosed amounts reconcile to the balance sheet totals. A loss recognized on the disposal group is not allocated to the major classes.
ASC 205-20 does not address the current versus long-term split. EY's view is that current classification is generally appropriate if the sale is probable, proceeds will be collected within one year and the proceeds are not expected to repay long-term debt in the near future. Prior-period classification does not change.
An illustration of the write-down. A disposal group has a carrying amount of $575,000 and a fair value less costs to sell of $450,000. The pretax loss is $125,000, which is the loss on disposal in the table above.
| Account | Debit | Credit |
|---|---|---|
| Loss on disposal, discontinued operations | 125,000 | |
| Valuation allowance, assets of discontinued operations | 125,000 | |
| Income tax receivable (at 40%, illustration) | 50,000 | |
| Income tax benefit, discontinued operations | 50,000 |
What must be disclosed?
For periods in which a component is disposed of or held for sale, disclose the facts and circumstances leading to the disposal, the expected manner and timing, the gain or loss if not on the face, and the reportable segment in which the operation is reported. For all periods presented, where it is not on the face of the income statement, disclose the pretax profit or loss and its major line items, such as revenue, cost of sales, depreciation and amortization and interest expense, reconciled to the after-tax amount. Also disclose either the total operating and investing cash flows of the discontinued operation, or its depreciation, amortization, capital expenditures and significant noncash items. If the entity has continuing involvement, disclose the types of involvement and any intra-entity amounts that continue after the disposal.
EPS for discontinued operations can be presented on the face or in the notes. See /us/blog/asc-260-earnings-per-share-worked-calculations.
Audit angle
- Test the component. Check that the operations and cash flows are clearly distinguishable from the rest of the entity.
- Test the strategic shift and major effect. Obtain management's analysis of assets, revenue and income of the component. Evaluate qualitative factors for a small component.
- Date the held-for-sale criteria. Agree each of the six criteria to board minutes, signed agreements and marketing evidence, and fix the date. Check the sale closing date against the period end.
- Test the recast. Agree prior-period amounts removed from continuing operations to the component's own ledger, and check that the balance sheet is recast for all periods.
- Test the cost boundary. Check that direct costs are in and continuing corporate overhead is out, and test any interest allocation to the stated policy.
- Test the disposal gain or loss and the tax. Recompute the loss on measurement and the tax allocated to discontinued operations.
- Check disclosures. Tie the pretax line items to the reconciliation and check that the segment is named.
- Read subsequent events. Changes in the plan of sale before issuance do not alter period-end classification. See /us/blog/subsequent-events-type-1-type-2-asc-855.
Common misstatements: a disposal presented as discontinued without a strategic shift, overhead allocated that will continue, prior-period balance sheets left unchanged, and held-for-sale classification delayed to the closing date.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- PwC Viewpoint, Financial statement presentation guide, 27.3 Criteria for reporting discontinued operations: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/financial_statement_/financial_statement___18_US/chapter_27_discontin_US/273_criteria_for_repo_US.html
- PwC Viewpoint, Financial statement presentation guide, 27.4 Presentation of discontinued operations: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/financial_statement_/financial_statement___18_US/chapter_27_discontin_US/274_presentation_US.html
- FASB, ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (strategic shift, held-for-sale criteria, examples, disclosures): https://storage.fasb.org/ASU%202014-08.pdf
- EY, Financial reporting developments: Discontinued operations (revised April 2026; interest and overhead allocation, balance sheet presentation, subsequent events, transition services): https://www.ey.com/content/dam/ey-unified-site/ey-com/en-us/technical/accountinglink/documents/ey-frdbb2878-04-03-2026.pdf
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