Individual Case Study Codification Assignment Fall 2022 Acco

Individual Case Study Codification Assignmentfall 2022accounting 3250i

The case study for this codification exercise, "Dynamic Divestures: A Codification Exercise on the Reporting of Discontinue Operations," is posted on Canvas. The assignment is due in class on November 8, 2022. Your paper should not exceed 20 pages (excluding title and reference pages) and should be single-spaced with page numbers included. To complete this assignment, consider the facts presented for each company within the case, consult the FASB Accounting Standards Codification (ASC) for guidance on answering the questions below, and include relevant ASC citations. Responses should be essay-formatted; bullet points or mere citations are insufficient. The total score for this assignment is 200 points, divided among the questions and a 29-point portion for writing style, organization, spelling, and grammar. The specific rubric is posted on Canvas.

Questions to be answered in this assignment

1. Why report discontinued operations? (9 points)
2. What is a component of an entity? What are a group of components of an entity? (9 points)
3. For each of the entities below, is the sale or disposition of business reporting a strategy shift? (27 points)
   • ZD Consulting Services
   • Hope Industries
   • AM Mining Operations
4. Is AM Mining Operations held for sale or use? (9 points)
5. Is AM Mining Operations part of discontinuing operations even though not sold? (9 points)
6. How are discontinuing operations to be reported on an income statement? (9 points)
7. How are discontinuing operations reported on a balance sheet? (9 points)
8. What should notes to discontinuing operations contain? (9 points)
9. How should gain or loss on sale of PPE be computed? (9 points)
10. How should impairment losses on PPE held for use be computed? (36 points)
    • How should impairment losses on PPE held for use be computed?
    • What does not make sense?
11. When to test for impairment loss on assets held for use? (9 points)
12. How do you compute impairment losses on assets held for sale? (9 points)
13. How should gains or losses on sale of assets not part of discontinued operations be reported? (9 points)
14. How should impairment losses on assets not part of discontinuing operations be reported on the income statement? (9 points)

Paper For Above instruction

The reporting of discontinued operations is a critical aspect of financial accounting, enabling stakeholders to evaluate an organization's operational performance without the distortions caused by strategic shifts or asset disposals. This paper explores the rationale behind reporting discontinued operations, the definition of components and groups of components within an entity, and the criteria that classify a sale or disposition as a strategy shift. It further examines specific case scenarios involving ZD Consulting Services, Hope Industries, and AM Mining Operations, determining whether their actions qualify as discontinued operations under FASB ASC guidelines. The paper also discusses asset classification, impairment testing, and the appropriate presentation of gains, losses, and impairments related to assets and operations approaching discontinuation.

Introduction

Financial statements serve as essential tools that provide transparency and accountability to investors, creditors, regulators, and other stakeholders. Discontinued operations are a focus within financial reporting because they give stakeholders insight into the core ongoing activities of an enterprise, separate from divestitures or strategic reorientations. Understanding the criteria for reporting discontinued operations under the FASB Accounting Standards Codification (ASC) enhances the clarity, comparability, and usefulness of financial statements.

Why Report Discontinued Operations?

The primary purpose of reporting discontinued operations is to improve the relevance and comparability of financial statements by segregating the financial impact of significant strategic decisions from the ongoing business. When a company disposes of a major component or line of business, the results associated with that component—such as gains or losses from sale, impairment costs, and operational results—are reported separately from continuing operations. According to ASC 205-20 (Presentation of Financial Statements—Discontinued Operations), this segregation helps users of financial statements assess the economic significance of such disposals and their impact on the company's financial health and future prospects.

Discontinued operations are reported separately to avoid misleading inferences about the company's ongoing profitability and operational efficiency. Such disclosures also assist in trend analysis, valuation, and decision-making, especially when large parts of a business are disposed of or classified as held for sale.

Components and Group of Components of an Entity

A component of an entity, as defined in ASC 205-20, is a segment of a business that has its own operations, cash flows, and financial information. This may include a subsidiary, division, or other part of the organization that can be distinguished operationally and financially from the rest of the entity. When it comes to reporting, a component must meet certain criteria regarding its disposal and the decision to sell or abandon it.

A group of components pertains to multiple components that are disposed of collectively. For example, a company may decide to sell several related divisions at once, which collectively constitute a strategic business unit or segment. When these components are disposed of together as part of a single transaction, their collective financial results can be reported as a single discontinued operation, provided they meet the criteria specified in ASC 205-20.

Strategy Shift versus Disposition of Business

Determining whether the disposal of a business is a strategy shift is vital for proper reporting. The assessment involves analyzing whether the sale or disposal reflects a change in strategic direction that will significantly affect the entity's operations and financial results. ASC 205-20 emphasizes that a strategy shift is characterized by a major change in the scope or direction of the business, such as exiting a product line, discontinuing a subsidiary, or abandoning a geographic segment.

For each entity—ZD Consulting Services, Hope Industries, and AM Mining Operations—the classification as a strategy shift depends on whether the disposal aligns with a significant change in strategic planning or a move to focus on core operations. If the sale is part of a broader restructuring plan, such as divestitures of non-core assets, it is likely to qualify as a strategy shift impacting the reporting of discontinued operations.

Case Analysis of Entities

In assessing whether the sale or disposition of each company qualifies as a strategy shift, one must consider the motivations, scope, and strategic planning involved. For example, if ZD Consulting Services sold a division to streamline focus on consulting core competencies, it may not constitute a strategy shift. Conversely, if Hope Industries divested a major manufacturing facility to shift toward services, this could be deemed a strategic change. Similarly, AM Mining Operations' disposal of a significant mining site in response to market conditions or regulatory pressures might constitute a strategy shift, subject to detailed analysis of intent and scope.

Held for Sale or Use and Discontinuing Operations

Asset classification is crucial in reporting discontinuing operations. Under ASC 360, assets held for sale are those that are available for immediate sale in their present condition, subject only to terms that are usual and customary. If AM Mining Operations is classified as held for sale, it must meet specific criteria, including active marketing and probable sale within a year.

An asset, even if not yet sold, can be part of a discontinuing operation if management commits to a plan and the asset qualifies as held for sale. Furthermore, assets that are not sold but are expected to be abandoned or otherwise disposed of in a manner consistent with sale criteria also fall within this scope. Whether AM Mining Operations qualifies as held for sale or part of discontinuing operations depends on compliance with these criteria.

Financial Reporting of Discontinuing Operations

On the income statement, discontinuing operations are reported separately from continuing operations, with any gains or losses recognized from the sale or disposal included in a distinct line item, typically titled "Discontinued operations." This includes operational results for the period and any gain/loss on disposition, presented net of tax to reflect the impact on net income accurately.

The balance sheet should present assets classified as held for sale at the lower of carrying amount or fair value minus costs to sell, with proper disclosures about the nature of the assets and liabilities associated with discontinued operations. Notes to the financial statements must include details about the assets, liabilities, gains, and loss estimates, along with management’s plans and assumptions regarding the disposal.

Gains or Losses on Sale of PPE

The gain or loss on sale of property, plant, and equipment (PPE) is computed as the difference between the sale proceeds and the carrying amount of the asset, considering any associated costs to sell. The formula is: Gain or Loss = Sale proceeds – (Carrying amount + selling costs).

This calculation ensures that the recognized gain or loss accurately reflects the economic transaction, influences the income statement, and impacts the reported net income.

Impairment Losses on PPE Held for Use

Impairment testing involves comparing the carrying amount of PPE to the asset’s recoverable amount, defined as the higher of fair value less costs to sell or value in use. If the carrying amount exceeds the recoverable amount, an impairment loss must be recognized. Computing impairment losses requires estimating the asset’s fair value or value in use using appropriate valuation techniques, including discounted cash flows or market comparables.

One aspect that can be problematic is the subjective estimation of recoverable amounts and continuous revaluation assumptions, which can lead to inconsistent impairment recognition (FASB, 2017). Challenges include determining appropriate cash flow forecasts and discount rates, emphasizing the need for consistent application and transparent disclosures.

Test for Impairment Losses on Assets Held for Use

The primary test occurs whenever events or circumstances suggest that the carrying amount may not be recoverable. These include significant declines in market value, adverse changes in economic conditions, or obsolescence. Management must estimate future cash flows and compare them to the carrying amount to determine whether impairment is necessary (ASC 360). If impairment is indicated, the loss equals the amount by which the carrying value exceeds the recoverable amount.

Impairment Losses on Assets Held for Sale

Assets held for sale are tested for impairment by comparing the fair value less costs to sell with the carrying amount. When the fair value minus costs to sell is less than the carrying amount, an impairment loss is recognized for the difference. This process involves market valuations, appraisals, and consideration of expected selling costs (ASC 360).

Reporting Gains or Losses on Assets Not Part of Discontinued Operations

Gains or losses arising from the sale of assets outside of discontinued operations are reported as part of net income from continuing operations. They are recognized on the income statement in the period of sale, with gains increasing net income and losses decreasing it, without special segregation unless the asset sale qualifies for separate presentation.

Impairment Losses on Assets Not Part of Discontinuing Operations

Impairments on assets used in continuing operations are recognized in the income statement. If the impairment relates to assets held and used, the loss must be reflected in the period’s income, affecting operational results. Proper disclosures about impairment assumptions, balance sheet impacts, and the effects on future accounting periods are essential for transparency (ASC 360).

Conclusion

Accurate reporting of discontinued operations requires careful application of FASB ASC standards to identify components, classify assets appropriately, and recognize impairment and sale-related gains or losses correctly. These practices enhance the transparency and comparability of financial statements, allowing stakeholders to make informed decisions. As companies continue to reshape their portfolios, understanding the delineation between continuing and discontinued operations is vital for effective financial reporting and analysis.

References

• Financial Accounting Standards Board (FASB). (2017). ASC 360 Property, Plant, and Equipment. Retrieved from https://asc.fasb.org
• Financial Accounting Standards Board (FASB). (2014). ASC 205-20 Presentation of Financial Statements—Discontinued Operations. Retrieved from https://asc.fasb.org
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