Question

FASB Codification Memo:

Your client is Jackson Holding Company. In 2018, they made plans to sell the assets of one of its divisions. They want to know how this will impact the presentation of their income statement. Prepare a memo explaining how the income statement would reflect the discontinued operation assuming the sale will not occur until 2019 when the fair value of the assets is expected to be $3,900,000. You should include a revised 2018 income statement beginning with income from continuing operations before income taxes.

ASC205-45-3

ASC205-45-3A

ASC205-45-3B

ASC360-10-35-40

Answer 1

Answer

On its year-end income statement of 2018, Jackson Holding Company will report as income from discontinued operations the profits generated by the discontinued business segment for the entire year, net of taxes.

When a company decides to discontinue an operation, it values the assets and liabilities of that operation at net current cost (fair value less selling costs). When a company remeasures the value of a discontinued operation, a value adjustment is made to recognize a loss, but not a gain, for the difference between book value of the net assets and their fair value net of selling costs.

If a company writes down the net assets of a discontinued operation from original carrying value to a remeasurement of fair value in one year, then in the next year the fair value changes, the company will recognize any subsequent loss but limited gains up to the original carrying value before remeasurement.

Both US GAAP and IFRS require the results of discontinued operations be shown separately from continuing operations on the income statement. Comparative information on the income statement must be restated. Both require disclosure of revenue, pretax income (loss) and gain (loss) on remeasurement for discontinued operations. US GAAP requires disclosure of the total income tax related to discontinued operations. IFRS requires disclosure of expenses, income taxes on operations and income taxes on gains (losses) on remeasurement related to discontinued operations.