ASC 205-20

Definition

ASC 205-20 is an accounting standard that provides guidance on the reporting and presentation of discontinued operations. This standard outlines how entities should classify, measure, and present discontinued operations in their financial statements, ensuring that the financial information is clear and useful for users.

5 Must Know Facts For Your Next Test

1. ASC 205-20 requires that discontinued operations must be reported separately from continuing operations on the income statement, allowing for clearer insights into financial performance.
2. The standard stipulates that both the results of discontinued operations and any gain or loss on disposal must be presented net of tax effects.
3. Entities must disclose key information about discontinued operations, including a description of the facts and circumstances leading to the discontinuation.
4. Measurement of assets and liabilities associated with discontinued operations should be based on fair value less costs to sell if they are classified as held for sale.
5. ASC 205-20 also mandates that financial statements include prior-period results for discontinued operations to provide comparability and context for users.

Review Questions

• How does ASC 205-20 affect the presentation of discontinued operations on financial statements?
  • ASC 205-20 requires entities to present discontinued operations separately from continuing operations in their financial statements. This means that when a company discontinues a part of its business, it must show the income or loss from that operation distinctly, allowing users of financial statements to assess the impact of those operations without confusion with ongoing activities. This separation helps provide clearer insights into the overall financial performance and health of the entity.
• What are the disclosure requirements outlined by ASC 205-20 regarding discontinued operations?
  • ASC 205-20 mandates that entities disclose significant information about their discontinued operations, including the reasons behind the decision to discontinue, the expected timeline for disposal, and any relevant financial data. These disclosures must also include the results of operations for the discontinued component along with any gain or loss from its disposal. This transparency helps stakeholders understand the implications of such decisions on the company's future performance.
• Evaluate how ASC 205-20 impacts the comparability of financial statements across periods for businesses undergoing restructuring.
  • ASC 205-20 plays a crucial role in enhancing the comparability of financial statements across periods by requiring consistent reporting for discontinued operations. By necessitating prior-period results to be included when presenting current results from discontinued segments, it allows users to analyze trends over time effectively. This is particularly important for businesses undergoing restructuring, as it provides investors and analysts with a clearer view of how strategic decisions are affecting overall performance and future prospects, thus facilitating informed decision-making.

Related terms

Discontinued Operations: A component of an entity that has been disposed of or is classified as held for sale, which represents a strategic shift and has a major effect on the entity's operations.

Assets Held for Sale: Assets that are expected to be sold rather than used in the normal course of business, typically recognized at the lower of carrying amount or fair value less costs to sell.

Income Statement: A financial statement that summarizes revenues, expenses, and profits or losses over a specific period, showing the performance of a business.