What’s more, companies that classify a subsidiary as a held-for-sale business can sometimes get a mild boost to earnings because the assets held by the subsidiary aren’t depreciated. That’s because, by definition, assets will be sold, and proceeds will be collected, in less than a year. Typically, companies depreciate assets over at least three years. In addition, any adjustment to the subsidiary’s asset value on the acquisition date is considered part of goodwill. Adjustments made after the acquisition date are run through the income statement, and ultimately affect earnings.
FASB also decided at its Wednesday meeting to propose changing some requirements for disclosing assets and liabilities classified as held for sale. The disclosure amendments, and the FAS 144 changes, all will be incorporated in an exposure draft that’s being crafted in tandem with the International Accounting Standards Board. At its June meeting, IASB approved all the recommendations that FASB approved last week.
Under the disclosure proposal, if newly acquired businesses meet the criteria for held-for-sale, then the parent company is exempt from a handful of footnote disclosure requirements that pertain to individual components of the business. For example, companies wouldn’t have to disclose information about recognized gains or losses related to the fair value of the asset. They also wouldn’t have to reveal information about major classes of assets and liabilities, income and expenses, and cash flows. Instead, parent companies would only have to describe the facts and circumstances leading to the expected disposal of the assets, the expected manner and timing of the disposal, and, if applicable, the segment within which the subsidiary belongs — three requirements that are currently in place.
For acquiring companies that have sold or own held-for-sale subsidiaries that don’t meet the held-for-sale criteria, four specific footnote disclosures are still required: major classes of revenues and expenses — including impairments, interest, depreciation, and amortization; net income attributed to the parent company; major classes of cash flows; and major classes of assets and liabilities.
A fifth disclosure describing how the company used the cash proceeds spawned by selling off the held-for-sale assets is currently required. But both FASB and the IASB decided to eliminate that requirement because the information is already described in cash-flow statements and the management’s discussion and analysis section of the annual report.