Question

This discussion thread test the Learning Objective of 4-4, Define what constitutes discontinued operations and describel the appropriate income statement presentation for these transactions. Companies often voluntarily provide non-GAAP earnings when they announce annual or quarterly earning.

Required: 1. What is meant by the term non-GAAP earnings in this context?

2. How do non-GAAP earnings relate to the concept of earning quality?

Answer 1

Discontinued operation :

The term itself indicated that there is some "discontinue" it may not be full business discontinue but part of it. e.g. A Ltd is running 4 business division and for one of the division if they have taken decision to divest it or due to market situation it has decided to close, such business will not contribute significantly profits and cash flow & such event will fall within the term "Discontinued operations"

There is technical definition as provided under US GAPP ASC 205-20 as under :

A discontinued operation consists of a component that has been disposed of or classified as held for sale, and that meets :

1. The operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity. 2.There will be no significant continuing involvement in the operations of the component after the disposal transaction

The criteria under IFRS is slightly different :

A discontinued operation must meet two criteria :

1. The asset or business component must be disposed of or reported as being held for sale.

2. The component must be distinguishable as a separate business that is being removed from operation intentionally or a subsidiary of a component being held with the intent to sell.

It will be useful to user of financial statement that income statement from normal operation and discontinued operation is shown separately so that user of financial statement can consider that for forthcoming periold entity will only be able to generated income for normal operation

Non-GAAP earning :

GAAP refers to Generally Accepted Accounting Principles. Every country have statutory body which defines GAAP and those accounting principle is followed by all entity. Following of GAPP is helpful in uniform understanding of financial statement and also helps in comparing performance with peers or industry.

Non-GAAP earning refers to income calculated by not following GAAP. Usually companies adopt reporting of non-GAAP earning to show earning after one-off expense/income & show income from business after excluding such one-off item. Non-GAAP earning is not audited and auditor do not express any opinion on the same.

Usually company adopts reporting of non-GAAP earning to exclude one-off cost or losses. However reporting non-GAAP measure may impact quality of reporting since it is pure management representation and as a result it may be used to exclude one-off which may not be clearly one-off as well - this is not always but there are possibilities of this hence it may impact financial reporting quality in adverse way.