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In each of the following circumstances, determine whether the disposal would qualify as a discontinued operation. All companies are calendar year companies and the transactions are occurring in 2017. Give citations from the ASC to justify your answer.
1. An entity manufactures and sells consumer products that are grouped into five major product lines. Each product line includes several brands that comprise the lowest where operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. Product line 1 is made up of almost 100 different individual products. Due to declining sales 3 products in Product line 1 were discontinued during the year.
2. An entity manufactures and sells consumer products that are grouped into five major product lines. Each product line includes several brands that comprise the lowest where operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. Product line 3 which makes up between 20 & 25% of the entity’s total revenues has experienced significant market declines while the other product lines have been growing. As a result, the entity has decided to sale its operations associated with Product line 3.
3. An entity operates restaurants in several states. For that entity, each restaurant comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. As a result of an above market offer for two of its restaurants in the state of Alabama, the entity sold these restaurants. These two restaurants produced between 1 & 3% of the entity’s total revenues and comprised about 1.5% of the entity’s total assets.
Expert Answer
TWO CRITERIA
1) OPERATION ASSETS OR COMPONENT MUST BE DISPOSSED OF OR HELD FOR SALE.
2) COMPONENT SHALL BE A DISTINGUISHABLE SEPRATE PART OF WHOLE BUSINESS OPERATION SUCH AS BUSINESS OR GEOGRAPHICAL SEGMENT WHICH IS INTENTIONALLY TO BE DISCONTINUED OR HELD FOR SALE
ANSWERS
1) IT IS SEPRATE COMPONENET, IT IS ALREADY DISCONTINUED WHICH MEANS THAT IT MIGHT BE SOLD OR HELD AS AVAILABLE FOR SALE.
IT IS DISCONTINUED OPERATION
2) IT IS SEPRATE PRODUCT LINE SIMILAR TO BUSINESS SEGMENTS. IT IS NOT DISPOSSED OFF BUT THEY HAVE DECIDED TO SALE IT OF WHICH MEANS IT IS HELD FOR SALE.
IT IS DISCONTINUED OPERATION
3) THE GEOGRAPHICAL SEGMENT OF RESTAURANT HAVE VERY LESS SHARE IN TOTAL REVENUE AND VERY LESS AMOUNT OF TOTAL ASSETS ARE EMPLOYED THERE.
THEREFORE IT IS NOT CONSIDERED AS REPORTABLE SEGMENT.
BUT IF MANAGEMENT HAVE SELECTED THAT SEGMENT AS REPORTABLE SEGMENT THAN IT WILL BE CONSIDERED AS REPORTABLE SEGMENT.
IN THAT CASE IT WOULD BE DISCONTINUED OPERATION.
