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Discontinuing Operations - Case Study Example


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Discontinuing Operations

ASC states that the separation must be possible physically and operationally and for financial reporting purposes. At the measurement date, the firm will accrue any estimated loss from operations during the “phase-out period, that is, from the measurement date of the disposal date, and any estimated loss on sale or disposal. However any gain on disposal can be reported only after disposal, that is when realized (Accounting Standards Codification. Implementation Guidance and Illustrations 1). At end of the year the income statement reporting of discontinued operations should reproduces the income statement and partial footnotes of the Pit Stop centers. The income statement should show the two components of the segment have been excluded from reported sales and income from continuing operations. This means that reported sales and earnings will be restated to exclude the discontinued segment. The disclosure note should also provide summary disclosure of the net assets and operating results of the discontinued segment. However, any gain or loss from the sale of a portion of a business segment must be reported pretax as separate component of income from continuing operations rather than as a discontinued operation. Firms are encouraged to disclose separately the affected assets and liabilities on the balance sheet. However, the income or loss from operations from the beginning of the year to the measurement date is not always segregated on the income statement. Some firms provide footnote disclosure

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of this datum for all years presented. The income or loss during the phase-out period and the gain or loss on sale or disposal is included in income from continuing operations(Accounting Standards Codification. Disclosure 1). Auto world had two different segments: the Auto Boyz Center and the Pit Stop Centers’. The company submits their financial statements as per the ASC. As per the ASC, the company discloses its financial reporting about different statements (Accounting Standards Codification 2). It has been found in the financial statements of company that the company’s net sales and operating earnings are mentioned Segment-wise. As per the ASC, the company also meets the criteria and it has to reveal the cost associated with the retirement or disposal of assets. As it winds up the Pit Stop Centers, the company management has to meet the requirement for presenting the cost due to termination of the operating leases and the other cost associated therewith. The Pit Stop Stores are the long-lived assets of the company as they include the buildings and some other property. Therefore, the company has to meet the criteria of ASC. The division had a negative cash flow of 172m in the year 2006, it is estimated that it will increase free cash flows by 58 million in the year 2008 and 67 million annually. If we take the cost of capital the company to be 10%, then we will estimate the significance of the cash flows of the company. The present value of this investment will be, present value will be calculated as Pv= + Pv= +=722.73m The return is greater as compared to the restructuring cost of 52 million. Conclusion and recommendation In addition, the company should make disclosures nonrecurring cost related to restructuring. The note should show that the 2007 restructuring cost of was $52 million. Note that these non-recurring items are reported pretax a part of the income


Name of of Professor March 12, 2012 Discontinuing Operations In accounting for discontinued operations, ASC requires that operating income from discontinued operations and any gains or losses from their sale be segregated in the income statement, since these activities will not contribute to future income and cash flows…
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Discontinuing Operations Case Study essay example
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