Background Diversified Holdings Inc. (DHI), a calendar-year company, operates th

ID: 2422426 • Letter: B

Question

Background Diversified Holdings Inc. (DHI), a calendar-year company, operates three separate businesses. In September 2014, DHI decided to make a strategic shift in its business and sell its candy segment because its revenues and earnings were declining due to health-conscious consumers. The Chocolate House (TCH) subsidiary represents the entire candy segment. You have been asked to help determine the appropriate accounting treatment related to this decision. In your analysis, you should consider the following additional information: DHI engaged a broker to help determine the value of the candy segment and to help locate a buyer. The broker indicated that given the age of the property, plant and equipment, the candy segment likely could be sold in less than a year if the offering price was $200 million. This offering price would also allow DHI to fully recover the cost of TCH’s inventory. DHI considered this a reasonable value for these operations. DHI obtained Board approval to sell TCH for $200 million in November 2014. The Board was informed that the estimated cost of selling TCH was $10 million. On December 1, 2014, DHI publicly announced its intention to dispose of its candy segment. At this time, DHI informed the broker that TCH was available for immediate sale. Prior to year-end, the broker was actively seeking buyers. Management has concluded that TCH should be accounted for as a discontinued operation. Relevant financial information as of December 31 is provided on the following page for DHI and TCH. All intercompany eliminations are already reflected in DHI’s consolidated financial information. The effective income tax rate in both 2013 and 2014 is 50%. For purposes of this analysis, do not consider any required segment disclosures.

Required Review the required disclosures for a discontinued operation in ASC 205-20-50 and ASC 360-10-45. Identify which paragraphs are the most relevant in detailing the necessary disclosures for discontinued operations.

Provide and record the journal entries required for TCH’s remeasurement.

Draft the required disclosures and revisions to the comparative consolidated financial statements assuming DHI reports using US GAAP

Explanation / Answer

205-10-05-3

The Discontinued Operations Subtopic discusses the conditions under which either of the following would be reported in an entity’s financial statements as a discontinued operation:

a. A component of an entity that either has been disposed of or is classified as held for sale

b. A business or nonprofit activity that, on acquisition, is classified as held for sale.

205-20-45-1B

A disposal of a component of an entity or a group of components of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occur:

a. The component of an entity or a group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale.

b. The component of an entity or group of components of an entity is disposed of by sale.

c. The component of an entity or group of components of an entity is disposed of other than by sale in accordance with paragraph 360-10-45-15 (for example, by abandonment or in a distribution to owners in a spinoff).

Component of an Entity

A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group.

205-20-45-1E

A component of an entity or a group of components of an entity, or a business or nonprofit activity (the entity to be sold), shall be classified as held for sale in the period in which all of the following criteria are met:

a. Management, having the authority to approve the action, commits to a plan to sell the entity to be sold.

b. The entity to be sold is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such entities to be sold. (See Examples 5 through 7 [paragraphs 360-10-55-37 through 55-42], which illustrate when that criterion would be met.)

c. An active program to locate a buyer or buyers and other actions required to complete the plan to sell the entity to be sold have been initiated.

d. The sale of the entity to be sold is probable, and transfer of the entity to be sold is expected to qualify for recognition as a completed dale, within one year, except as permitted by paragraph 205-20-45-1G. (See Example 8 [paragraph 360-10-55-43], which illustrates when that criterion would be met.)

e. The entity to be sold is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which an entity to be sold is being marketed is indicative of whether the entity currently has the intent and ability to sell the entity to be sold. A market price that is reasonable in relation to fair value indicates that the entity to be sold is available for immediate sale, whereas a market price in excess of fair value indicates that the entity to be sold is not available for immediate sale.

f. Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

So, from the above analysis, selling of TCH is regarded as discontuing operations.

Answer 2 :-

Operating Rules

Time Period

Accounting Treatment

Measurement Date

· all income from operation relating to that segment are retroactively carved out from continuing operation and reclassified as “Loss (Income) from Discontinued Operations”, net of tax

Phase-out Period

· all results from continuing to operate the segment are recorded under “Loss on Disposal (Sale), net of tax

Disposal Date

· loss or gain from the sale is recorded under the caption “Loss on Disposal (Sale), net of tax

Disposal Date after End of Reporting Period

· if it is known that the segment will be disposed of after the end of the year but prior to the publication of the F/S, all gains and loss up to the disposal date shall be estimated

· if the losses exceed the gains, recognize the net loss under the caption “Loss on Disposal (Sale)”

· if gains exceed losses, recognize the gain such that the losses are zeroed-out; do not recognize a net gain until the reporting period in which the disposal occurs

Answer 3 :-

205-20-45-3A

The results of all discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income before extraordinary items (if applicable). For example, the results of all discontinued operations may be reported in the statement where net income is reported of a business entity is reported as follows :-

Income from Continuing Operations xxxx

Less : Income Taxes xx

Net Income xxxx

Discontuing OPerations

Loss from operations from discontinuing operations (including loss from 10

disposal of TSH)

Income Tax benefit (50%) 5

Loss from discontinuing operations 5

Net Income xxxx+5

Remarks : It is assumed that 200 million $ is the cost of TSH and only expense incurrend for selling the unit i.e. $10 million is the net loss for discontinuing oprations.

205-20-45-3B

A gain or loss recognized on the disposal (or loss recognized on classification as held for sale) shall be presented separately on the face of the statement where net income is reported or disclosed in the notes to financial statements (see paragraph 205-20-50-1(b)).

205-20-45-3C

A gain or loss recognized on the disposal (or loss recognized on classification as held for sale) of a discontinued operation shall be calculated in accordance with the guidance in other Subtopics.