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Lesson 15, Topic 3

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✏️+🎥Discontinued Operation: Impairment Loss🟢

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Impairment loss for discontinued operation Download

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Anant 10 September 2024

Thank you for the new addition, can you link where i can find single and multi step income statement video with ppt document

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1. Maroun, CPA 11 September 2024
  
  Hello Anant,
  
  You’re most welcome!
  Here’s the link for the single and multi-step income statement video with ppt document:
  https://farhatlectures.com/courses/2024-far-becker-supplemental-course/lessons/%f0%9f%8e%a5-f1m1-balance-sheet-income-statement-and-comprehensive-income/topic/%f0%9f%8e%a5income-statement-content-format-elements/
  
  Please let me know if you need any further guidance!
  
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AMAN JOSHUA LAL 5 October 2024

Hi team , Just had a little query , as we understood that there will be no depreciation on the assets for the component of an Entity when the management decides to sell it ? So why does the break-up of first year contains a Depreciation of $1200000

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1. Maroun, CPA 9 October 2024
  
  Hello Aman,
  
  Because the board of directors decided on March 31, Year 1, to dispose of the cycling division.
  The depreciation expense relates to the period from January 1 to March 31.
  
  When management decides to sell a component of an entity, the component is classified as “held for sale” under U.S. GAAP. Once an asset or component is classified as held for sale, it should no longer be depreciated because its value is now being measured based on fair value less costs to sell, rather than its historical cost basis.
  
  However, depreciation before the component is classified as held for sale is still recognized in the financial statements. This means if the component was in use and generating depreciation expense earlier in the year, that depreciation up until the point of the “held for sale” classification is still recorded.
  
  I hope this makes sense!
  
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Samanyu Sreeram 9 December 2024

Hi, are impairment losses on assets only recognized on discontinued segments of entities, or can it apply to other assets that do not fall under these criteria?

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1. Srinivas Karanam 19 January 2025
  
  Can be for other assets also. For discontinued operations you show net of tax and separate line item.
  
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Angelika 11 December 2024

In discontinued operations, the selected component is discontinued from the company and placed in discontinued operation in the income statement. That pause is until the element is sold. I am confused between selling discontinued operations and selling an asset placed in non-operating income. Could you provide examples that show the difference between the two selling being performed? In my understanding aren’t both discontinued?

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1. Maroun, CPA 21 January 2025
  
  Hello Angelika,
  
  Great question! Let’s break this down step by step to clarify the difference between discontinued operations and the sale of an asset reported in non-operating income.
  
  1. Discontinued Operations
  Discontinued operations involve the sale or disposal of a separate component of a company that:
  – Represents a significant line of business or geographical area,
  – Has been decided to be sold, disposed of, or abandoned, and
  – Is considered a strategic shift
  
  When a component is classified as discontinued, its results (income or loss) are segregated from continuing operations in the income statement and presented in a separate section below continuing operations. This separation provides better clarity for users of financial statements.
  
  Example: A company operates two divisions: a retail clothing line and an electronics line. If the company decides to sell the electronics division, the entire division’s results (revenue, expenses, gains/losses) would be classified as discontinued operations. The income statement would show:
  – Income from Continuing Operations: Results from the retail division.
  – Discontinued Operations: Results from the electronics division, including any gain or loss on its sale.
  
  2. Sale of an Asset in Non-Operating Income
  The sale of an asset, such as equipment, land, or a building, does not involve discontinuing an entire line of business. Gains or losses from such sales are reported in the non-operating income section under income from continuing operations because they are unusual and/or infrequent. They are not part of a company’s core operations.
  
  Example: A manufacturing company sells a piece of unused machinery or a building it no longer needs. The gain or loss from this sale is not related to a decision to discontinue a component of the business but is instead recorded in the non-operating income section.
  
  I hope this helps!
  
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Judith Saungweme 8 February 2025

Please can you help me with an example of the treatment when the fair value increases the year of disposal.

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1. Maroun, CPA 14 February 2025
  
  Hello Judith,
  
  In the year of disposal, the fair value is irrelevant because the gain or loss is determined based on the selling price and the carrying value at the beginning of the year.
  
  To clarify with an example:
  
  Assume a company has a discontinued operation with a carrying value of $500,000 at the beginning of the year.
  
  If the company sells the discontinued segment for $600,000, the gain on disposal would be:
  $600,000 (selling price) – $500,000 (carrying value) = $100,000 gain
  
  If the company sells it for $450,000, the loss on disposal would be:
  $450,000 (selling price) – $500,000 (carrying value) = $50,000 loss
  
  Now, what if the fair value increased during the year to $550,000, but the company still sells it for $600,000? The fair value change is ignored—only the actual selling price matters for recognizing the gain or loss in the year of sale.
  
  This is because in the year of disposal, the accounting treatment does not reassess fair value changes but rather records the actual gain or loss based on the final sale transaction.
  
  Let me know if I misunderstood your question!
  
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Michael Zhang 16 April 2025

why did we include the depreciation expense when calculating operating loss for year 1? i thought depreciation should not be included as soon as the operation is classified as discontinued.

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1. Maroun, CPA 19 April 2025
  
  Hello Michael,
  
  Depreciation stops only from the date a component first meets the “held‑for‑sale” criteria in ASC 205‑20.
  In this example, the cycling division is not classified as held for sale until March 31, Year 1 (the date of the board of directors’ decision). All months before that date are still “held‑and‑used,” thus normal depreciation continues and is part of the division’s operating results for Year 1.
  
  Accordingly:
  – Year 1 operating loss includes the depreciation that accumulated up to the classification date.
  – From the held‑for‑sale date forward (i.e., from March 31, Year 1 until disposal), no further depreciation is recorded; instead, the assets are carried at the lower of carrying amount or fair value less cost to sell, and any additional write‑downs are shown as impairment losses.
  
  Therefore, depreciation is included in the Year 1 loss because the division was depreciated during the period it was still being used; it ceases only after the division is formally classified as held for sale.
  
  I hope this helps!
  
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Scott Stern 26 May 2025

Do you always take impairement loss in the year you decide to sell?

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1. Maroun, CPA 27 May 2025
  
  Hello Scott,
  
  When a component is classified as held for sale, its carrying amount is compared to the fair value less the cost to sell. If the fair value is lower, the impairment loss must be recognized immediately. This loss is distinct from regular impairment losses, as it applies specifically to assets held for sale as part of discontinued operations.
  
  Thus, you recognize a loss only when the book value exceeds the fair value, whether that happens in the year you decide to sell or later. If the carrying amount already equals or is below fair value at the classification date, no impairment is recorded until a later decline occurs.
  
  I hope this helps!
  
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Ali 4 June 2025

What is the effect of the impairment loss calculated in this video example ($ 2000,000) in the balance sheet?

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1. Maroun, CPA 5 June 2025
  
  Hello Ali,
  
  The $2,000,000 impairment loss means that on the balance sheet, you write the cycling division’s carrying value down from $5,000,000 to $3,000,000 (its fair value less costs to sell).
  At the same time, equity is reduced by $2 million (the impairment flows through the income statement, closing into retained earnings), so total assets and total equity each decline by $2 million.
  
  I hope this helps!
  
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JASMINE KAUR 31 July 2025

Hi, may I have the PowerPoint notes for this video? It’s not there.

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1. Maroun, CPA 1 August 2025
  
  Hello Jasmine,
  
  It’s above the video. Please click on the word “Download” and let me know if it works.
  
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Deeksha Chopra 23 April 2026

In the example discussed in this session, depreciation expense was listed as an expense under the expenses from discontinued operations. However, we studied earlier that depreciation and amortization is stopped as soon as the component is held for sale. How should we determine when to include depreciation expense and when not to?

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1. Maroun, CPA 25 April 2026
  
  Hello Deeksha,
  
  The rule is: depreciation/amortization continues up to the date the component is classified as held for sale, and stops after that date.
  
  Thus, the way to think about it is:
  – Before held-for-sale classification → include depreciation expense
  – After held-for-sale classification → do not record depreciation or amortization
  
  In this example, the board decided on March 31, Year 1 to dispose of the cycling division. So any depreciation included in Year 1 should be interpreted as depreciation up to March 31, Year 1. After that date, depreciation should stop.
  
  Hope this makes sense!
  
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Christopher Zogheib 2 August 2026

So a little follow up to the idea of as of 1/1 when shifting to held for sale 3/31. What happens on 10Qs? I assume Q1 reported the cycling division as income from continuing operations. But on the Y1 10k Q1 will be discontinued. Does that granularity appear on quarterly income statements? And if so, is there an adjustment that reclasses the Q1 continuing operations from cycling to discontinued?

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1. Maroun, CPA 3 August 2026
  
  Hello Christopher,
  
  Assuming the held-for-sale and discontinued-operation criteria are met on March 31, the Q1 Form 10-Q should already present the cycling division’s results for January 1 through March 31 as discontinued operations, net of tax. The Q1 statements are prepared after the quarter ends, so they would not first report the division in continuing operations.
  
  However, the held-for-sale measurement begins on March 31, not retroactively on January 1. Any impairment is measured on March 31, and depreciation stops from that date.
  
  If the criteria were not met until Q2, the original Q1 presentation would have been continuing operations. In the Q2 year-to-date statements, the Q1 results would then be reclassified and included in discontinued operations. Prior periods presented are recast for comparability.
  
  This is a financial-statement presentation reclassification, not a journal entry. Total net income does not change; the amount simply moves from continuing operations to discontinued operations.
  
  The Year 1 Form 10-K would present the division’s entire Year 1 results as discontinued operations. The annual income statement generally presents the full year rather than a separate Q1 amount.
  
  Hope this helps!
  
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