cica 3475 longlivedassets

7/30/2019 CICA 3475 LongLivedAssets

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Guide to Accountinfor the Disposal of

Long-lived Assets

and Discontinued

Operations

An Analysis of CICA Handboo

Section 3475

AUDIT


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Section 1 Overview 1

Section 2 Scope 3

QUESTIONS

1. Oil and Gas Properties Under the Full-Cost Method 3

2. Debt Issuance Costs 4

3. Equity Method Investments 4

4. Costs Incurred in Connection With a Disposal of Long-lived Assets 4

Section 3 Disposal by Abandoment, or Exchange or Distribution 6

Section 4 Conditions For Classifying an Asset or Group as Held For Sale 8

QUESTIONS

5. Continued Use of Assets 9

6. Backlog of Uncompleted Customer Orders 9

7. Real Estate Property Acquired Through Foreclosure 9

8. Notification and Transfer Restrictions 10

9. Due Diligence Procedures 10

10. Long-Term Supply Arrangement 10

11. Plan to Close Manufacturing Facilities After Next Production Cycle 11

12. Plan to Close a Store 1113. Uncertainty About Nature of Disposition (Sale or Lease) 11

14. Commitment to Sale-leaseback Transaction 12

15. Asset Classification in Subsidiary Statements When Parent Plans to Sell the Subsidiary 13

16. Commitment to Remediate Environmental Contamination 13

17. Extension of Period Required to Complete Sale 13

18. Decline in Market Conditions 14

19. Foreclosed Assets 15

20. Subsequent Decision Not to Sell an Asset 15

21. Disposal of Substantially all of the Assets 16

Table Of Contents

This Guide contains materials that have been reproduced from CICA Handbook Section 3475, Disposal of Long-Lived Assets and

Discontinued Operations, and other related guidance with the permission of The Canadian Institute of Chartered Accountants.

All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the

date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate

professional advice after a thorough examination of the particular situation. The information contained herein is current at October 31, 2004

and users are responsible for informing themselves of any changes in accounting standards since that date.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.


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Section 5 Measurement of an Asset or Disposal Group Classified as Held For Sale 17

QUESTIONS

22. Costs to Sell 18

23. Including Goodwill in the Carrying Amount 18

24. Allocating Measured Impairment Loss within Asset Group 18

25. Foreign Currency Translation Adjustment 19

Section 6 Income Statement Reporting of Discontinued Operations 20

QUESTIONS

26. Assets Outside the Scope of HB 3475 21

27. Operations to Be Disposed of Through Run-off 21

28. Equity Method Investments 22

29. Sales in the Normal Course of Business 22

30. Evaluating the Materiality of a Discontinued Operation 23

31. Relationship of Component of an Entity to an Asset Group 24

32. Oil and Gas Properties Accounted for Under the Full Cost Method 24

33. Corporate Overhead Allocation 25

34. Subsequent Decision to Retain a Disposal Group 25

35. Criteria Met After Year End 26

36. Earnings per Share 26

37. Investor Income Statement Presentation of Discontinued Operationsof an Equity Method Investee 27

38. Presentation of Minority Interest When Parent Reports Subsidiary asa Discontinued Operation 27

Section 7 Reporting Impairment Losses on Assets Held and Usedand Disposal Gains or Losses in Continuing Operations 28

QUESTIONS

39. Gain on Sale or Other Disposal of a Long-lived Asset 28

Section 8 Balance Sheet Presentation and Disclosure of Composition

of a Disposal Group Classified as Held For Sale 29

QUESTIONS

40. Classification of Assets and Liabilities of a Disposal Group 29


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Section 9 Issues Related to Discontinued Operations ReportingFor Real Estate Entities 30

QUESTIONS

41. Build-to-Suit Property With Contract to Sell 30

42. Property Sold Before Rental Revenues Commence 30

43. Property Classified as Held and Used During Lease-up Period 31

44. Property Classified as Held for Sale During Lease-up Period 31

45. Sale of Refurbished Property 32

46. Sale of a Majority Interest in a Previously Controlled Real Estate Entity When

the Retained Minority Interest is Accounted for Under the Equity Method 32

47. Sale of a Majority Interest in a Previously Controlled Real Estate Entity When the

Retained Minority Interest Is Accounted for Under the Cost Method 33

48. Sale of Property to an Equity Method Investee 33

49. Sale of Property and Concurrent Management Agreement 33

Section 10 Transition 35

50. Run-off Operations Under HB 3475 35

Acronyms Defined 36


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Guide to Account ing for the Disposal of Long- l ived Assets and Discont inued Operat ions An Analysis of C ICA Handbook Sect ion 3475 1

In December 2002, the Accounting Standards Board (the AcSB or the

Board) of The Canadian Institute of Chartered Accountants (CICA) issued

Handbook (HB) revised Section 3475 (HB 3475 or the Section),

Disposal of Long-Lived Assets and Discontinued Operations, which

addresses the recognition, measurement, presentation and disclosure of the

disposal of long-lived assets and of discontinued operations. HB 3475

supersedes the write-down and disposal provisions of HB 3061, Property,

Plant and Equipment.

HB 3475 also supersedes the accounting and reporting provisions of previousSection 3475, Discontinued Operations, for the disposal of a segment of a

business. However, it retains the requirement in previous Section 3475 to

report separately discontinued operations and extends that reporting to a

component of an entitythat an entity either has disposed of (by sale,

abandonment or in a distribution to owners) or classified as held for sale. By

broadening the presentation of discontinued operations to include more

disposal transactions, the CICA intended to enhance managements ability to

provide information that helps financial statement users to assess the effects

of a disposal transaction on the ongoing operations of an entity.

In 2001, the AcSB decided to develop a new accounting standard on theimpairment of long-lived assets. After considering alternative approaches, it

was decided to harmonize with U.S. Financial Accounting Standard Board

(FASB) Statement No. 144, Accounting for the Impairment or Disposal of

Long-Lived Assets. In addition to impairment, Statement No. 144 addresses

accounting for the disposal of long-lived assets by sale or otherwise, as well

as discontinued operations.

The guidance on accounting for long-lived-assets was more complete in

Statement No. 144 than in existing Canadian generally accepted accounting

principles (GAAP), and the discontinued operations provisions created a

GAAP difference where U.S. and Canadian GAAP were previously consistent.

Consistent with its objective of facilitating access by Canadian enterprises to

U.S. and global markets by eliminating or minimizing GAAP differences within

North America and internationally as appropriate, the AcSB decided to include

the disposal of long-lived assets and discontinued operations within the scope

of the project. The new standard is based upon the provisions on accounting

Section 1 Overview

2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.


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2 Guide to Account ing for the Disposal of Long- l ived Assets and Discont inued Operat ions An Analysis of C ICA Handbook Sect ion 3475

for the disposal of long-lived assets by sale or otherwise as well as

discontinued operations provisions contained in Statement No. 144.

Note that the provisions related to the impairment of long-lived assets are

covered in HB 3063, Impairment of Long-Lived Assets.

This publication identifies some of the significant issues that an entity faces as

it implements HB 3475, and provides KPMGs perspective on the implications

and resolution of those issues in a question-and-answer format.

November 2004



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Section 2 Scope


The impairment recognition and measurement, presentation and disclosure

provisions of HB 3475 related to the disposal of long-lived assets apply to

profit-oriented entities. The presentation and disclosure provisions for

discontinued operations apply to all entities, that is, both business enterprises

and not-for-profit organizations. Not-for-profit organizations would account for

the disposal of long-lived assets in accordance with HB 4430, Capital Assets

Held by Not-for-Profit Organizations.

With the exception of the items identified in the following paragraph, HB 3475

applies to all recognized non-monetary long-lived assets that will be disposedof. HB 3475 applies not only to an individual long-lived asset but also to a group

of assets to be disposed of, by sale or otherwise, together as a group or in a

single transaction, and liabilities directly associated with those assets that will

be transferred in the transaction (in this guide, we use asset and group

synonymously). Long-lived assets include capital lease assets of lessees,

assets of lessors subject to operating leases, proved oil and gas properties that

are accounted for using the successful-efforts method of accounting, long-term

prepaid assets and intangible assets with finite lives.

The provisions of HB 3475 do not apply to:

The disposal of goodwill;

Impaired loans;

Long-term investments, including equity method investments;

Oil and gas assets accounted for using the full cost method of

accounting;

Unproved oil and gas properties accounted for using the successful-efforts

method of accounting; and

Servicing assets.

Q1. Do the impairment provisions of HB 3475 apply to oil and gasproperties that an entity accounts for using the full-cost method?

Answer. No. The impairment provisions of HB 3475 do not apply to oil and

gas properties that are accounted for using the full-cost method.

If the full cost method of accounting is being used to account for

exploration costs, paragraphs 22 to 28 of AcG-16, Oil and Gas Accounting

Full Costneed to be followed for accounting for disposal of properties.



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Q2. Are debt issuance costs within the scope of HB 3475?

Answer. No. HB 3475 does not cover debt issuance costs. Debt issuance

costs are deferred costs that are a component of the effective interest rate

on the associated debt instrument; they are not depreciable or amortizable

long-lived assets.

Q3. Does HB 3475 address investments accounted for by the equity method?

Answer. No. Equity method investments are financial instruments, not

depreciable or amortizable long-lived assets. Paragraph .02(c) of HB 3475

excludes equity and cost method investments from its scope. An entity

evaluates an equity method investment for impairment based on the

guidance in paragraphs .20 to .26 of HB 3050, Long-Term Investments.

Under that guidance, an investment is impaired if the value of the

investment declines and that decline is other than temporary. However,

HB 3050 provides little additional guidance on when a decline in value is

other than temporary and, if so, how the impairment loss should be

measured. We believe that it is acceptable to apply, by analogy, the

guidance in HB 3063, Impairment of Long-Lived Assetswhen evaluating

individual equity method investees for impairment.

Q4. Does HB 3475 address when an entity should recognize a liability forcosts incurred in connection with a disposal of long-lived assets?

Answer. No. HB 3475 addresses only impairment of long-lived assets, and

does not provide any guidance on when a liability should be recognized for

costs that will be incurred in connection with the disposal of long-lived

assets. Costs associated with a disposal activity include:

Costs to terminate an existing contractual obligation, including but

not limited to an operating lease;

Incremental direct (and other) costs associated with the related

disposal activity (such as costs to close or consolidate facilities); and


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Termination benefits provided to involuntarily terminated employees

pursuant to a one-time benefit arrangement that does not constitute

a preexisting or newly created ongoing benefit plan covered by

other accounting pronouncements.

The question of when a liability should be recognized for the types of

costs described above is addressed in EIC-134, Accounting for Severance

and Termination Benefits, and EIC-135, Accounting for Costs Associated

with Exit or Disposal Activities (including Costs Incurred in a

Restructuring).



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Section 3 Disposal by Abandonment,or Exchange or Distribution


An entity plans to abandon a long-lived asset in the future.

Under HB 3475, a long-lived asset an entity plans to abandon is disposed of

when the entity ceases to use it. That is, the entity continues to classify the

asset as held and used until the entity ceases to use it. If an entity plans to

abandon an asset before the end of its previously estimated useful life, an

entity evaluates the asset for impairment in its held-and-used grouping. If the

asset is part of a larger group that passes the recoverability test, the entity

cannot write down the asset to its fair value. Rather, the entity must revise

the depreciation estimates for the asset in accordance with HB 1506,

Accounting Changes, to reflect the remaining expected period of use of the

asset. In effect, the entitys only alternative is to depreciate the assets

remaining carrying amount less its salvage value, if any, over its remaining

expected use period.

Paragraph .06 of HB 3475 states that because the continued use of a long-

lived asset demonstrates the presence of service potential, it would be

unusual for a long-lived asset that an entity plans to abandon after a remaining

future use period to have a fair value of zero. Therefore, the entity should

estimate fair value using a valuation technique that reflects the continued

service potential of the asset. However, it is not appropriate to estimate the

fair value of an asset that will be abandoned in the future by recognizing an

impairment loss that normalizes depreciation expense for the asset over its

remaining period of use.

If the asset or its group fails the recoverability test, the fact that the entity

continues to use the asset indicates that the asset has service potential to the

entity. Therefore, it is unlikely that the asset has a fair value of zero at the date

of the impairment measurement.

In contrast, in some situations there may be idle assets within an asset

group that have no service potential and, therefore, a fair value of zero.

While management may not have committed to a formal plan to abandon or

otherwise dispose of the idle asset, the entity effectively has abandoned the

asset because no future service potential exists.


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An entity plans to exchange a long-lived asset for a similar

productive long-lived asset or to distribute the asset to owners

in a spinoff.

HB 3475 specifies that a long-lived asset that will be exchanged for a similar

productive long-lived asset or that will be distributed to owners in a spinoff

continues to be classified as held and used until the exchange or distribution

occurs. If the asset or its group is tested for recoverability prior to the

exchange or distribution, estimates of future cash flows in the recoverability

test should be developed as if the asset will be held and used for its

remaining useful life, that is, assuming that the disposal transaction will not

occur. At the date of the exchange or distribution, an entity recognizes an

impairment loss for the excess of the carrying amount of the asset over its

fair value.



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Q11. Should an entity that plans to close two of its manufacturing facilitiesfollowing the upcoming years production cycle as part of anacquisition-integration plan classify the facilities as held and usedor held for sale under HB 3475?

Answer. The entity should classify the facilities as held and used.

The entitys need to use the facilities for another production cycle

demonstrates that the property is not available for immediate sale as

required by paragraph .08(b). Rather, the entity should evaluate the

facilities for impairment as assets held and used. If those facilities pass

the recoverability test, the entity should review its depreciation estimates

and method, and adjust the useful lives of the assets and estimated

salvage values.

Q12. If an entity commits to a plan to close a store, should the entityclassify the stores long-lived assets as held for sale if a store closureteam (a group of employees responsible for executing all storeclosures) is not available to execute the closure for three months and,in the meantime, the store will continue to operate?

Answer. No. Because the store closure team is not available to execute

the closure, the long-lived assets are not available for immediate sale

under paragraph .08(b). Even if it locates a buyer, the entity cannot

transfer the long-lived assets until the store closure team is available.

The long-lived assets do not meet the available-for-immediate-sale

criterion until the date that the store closure team becomes available.

Q13. If an entity that is a commercial leasing and financing companyintends to sell or lease equipment that recently came off lease, doesthe equipment meet the condition in paragraph .08(d) if the entity willconsider a lease arrangement on the equipment that is classified as anoperating lease under HB 3065, Leases?

Answer. No. Paragraph .08(d) requires that the sale of a long-lived asset

be probable, and that the entity expects the transfer of the asset to

qualify for recognition as a completed sale, within one year. In this

example, the entity does not yet know whether the ultimate transaction

will be a sale, a lease arrangement (sales-type or direct-finance) in which

the equipment is sold or an operating lease (in which case, the equipment

remains on the entitys balance sheet); therefore, it cannot classify the

equipment as held for sale.



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Q14. Should an entity classify an asset as held for sale if it commits to aplan to sell a property in a sale-leaseback transaction and through theleaseback, the entity as the seller-lessee will retain more than a minorportion of the use of the property?

Answer. No. Paragraph A5 of HB 3475 specifies that an asset that an

entity intends to sell in a sale-leaseback transaction does not meet the

condition in paragraph .08(d) to be classified as held for sale if the entity

will retain more than a minor portion of the use of the property through

the leaseback. We believe that guidance prohibits an entity from

classifying the asset as held for sale even if the terms of leaseback will

qualify as an operating lease under HB 3065 and the transaction

otherwise will meet the conditions for sale-leaseback accounting (under

EIC-25, Accounting for Sales with Leasebacks, sale-leaseback accounting

is a method of accounting for a sale-leaseback transaction in which the

seller-lessee records the sale, removes the property from its balance

sheet, recognizes a gain or loss on the sale and classifies the leaseback in

accordance with HB 3065). Therefore, the entity should classify the

property as held and used until the sale-leaseback transaction occurs.

HB 3475 does not address how an entity should perform the

recoverability test for an asset it intends to transfer in a sale-leaseback

transaction. We believe that how an entity will account for the sale-

leaseback transaction affects the composition of the cash flows in the

recoverability test. Typically, an entity structures a sale-leaseback

transaction to qualify for sale-leaseback accounting and operating lease

classification of the leaseback. Accordingly, the entity will remove the

asset that is the subject of the sale-leaseback from its balance sheet

when the transaction closes. In that case, we believe that the

recoverability test should include cash flows from operations until the

sale-leaseback transaction will occur and the selling proceeds for the

asset, as determined under EIC-25, Accounting for Sales with

Leasebacks(the stated sales price in the transaction adjusted for any off-

market leaseback terms). If the asset fails the recoverability test, the

entity writes the asset down to its fair value, as indicated by the terms of

the sale-leaseback transaction. If the asset passes the recoverability test,

but normal depreciation for the period before the sale-leaseback will result

in a loss at the sale-leaseback date, the entity should adjust the

depreciation estimates for the asset to eliminate the excess carrying

amount over the remaining use period as an owned asset.



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If the entity expects to classify the leaseback as a capital lease, the cash

flows that the entity uses in the recoverability test must extend through

the term of the leaseback.

Q15. Should a subsidiary classify its long-lived assets as held for sale in itsseparate financial statements if the subsidiarys parent plans to sell thesubsidiary in a stock transaction and has classified the subsidiaryslong-lived assets as held for sale in the consolidated financialstatements?

Answer. No. In the subsidiarys separate financial statements, the

subsidiary should classify its long-lived assets under HB 3063 as assets

held and used and perform the recoverability test without regard to the

parents plan. The subsidiary is a continuing business and its management

has not committed to dispose of any of the assets of the business. From

the subsidiarys perspective, its assets still are classified as held and used,

even though the subsidiary itself is the subject of a planned sale by the

parent. The consolidated entity classifies the subsidiarys long-lived assets

as held for sale if it satisfies the six criteria in paragraph .08 of HB 3475.

Q16. Should an entity continue to classify a property as held for sale if,before it obtains a firm purchase commitment, the entity becomes

aware of environmental contamination and voluntarily decides toremediate the contamination before it transfers the property to abuyer?

Answer. No. The delay in the timing of the transfer of the property

imposed by the entity before it obtains a firm commitment demonstrates

that the property is not available for immediate sale. Therefore, the

property does not continue to meet the criterion in paragraph .08(b) and

the entity should reclassify the property to held and used.

Q17. What is the effect on an entitys ability to classify an asset as held forsale of an unexpected condition that a buyer or other party imposes

that will extend the period required to complete the sale beyond oneyear if an entity already has a firm purchase commitment to sell theasset?

Answer. The entity continues to classify an asset as held for sale if it

obtains a firm purchase commitment and the buyer or another party

unexpectedly imposes conditions on the transfer of the asset that will

extend the period required to complete the sale and (a) the entity has

initiated or will initiate on a timely basis actions necessary to respond to



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the change in circumstances and (b) the entity expects a favorable

resolution of the delaying factors.

For example, a firmly committed buyer performing due diligence on a

manufacturing facility may identify environmental damage that was not

known to exist when the parties entered into a firm purchase

commitment. If the buyer requires that the entity remediate the damage,

and that remediation will extend the period required to complete the sale

beyond one year, under paragraph .09 of HB 3475, the entity continues to

classify the asset as held for sale provided satisfactory remediation of the

damage is probable. If the buyer cancels the transaction and the entity

reasonably expects that any other potential buyer would impose similar

requirements, the asset no longer qualifies as an asset held for sale.

Q18. Should an entity continue to classify an asset as held for sale if theasset has been in that classification for one year, but the entity hasbeen unable to find a buyer because of poor market conditions?

Answer. It depends. The entity must evaluate whether it (a) initiated

actions necessary to respond to the poor market conditions during the

initial year, (b) continues to actively market the asset at a price that is

reasonable in view of market conditions, and (c) continues to meet all ofthe other criteria in paragraph .08 for classifying the asset as held for sale.

For example, the entity would continue to classify the asset as held for

sale if the entity continually reduced the selling price for the asset over

the past year and intends to adjust the selling price over the next year, as

necessary, to find a buyer.

In contrast, if the entity now is unwilling to reduce the selling price further

on the basis that the market decline for the asset is temporary, the asset

is not available for immediate sale as required under paragraph .08(b) of

HB 3475. Additionally, paragraph .08(e) requires that an entity market an

asset at a price that is reasonable in relation to its current fair value.Therefore, the entity does not meet the conditions for an exception to the

one-year requirement in the Section and must reclassify the asset to held

and used.



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Q19. How do the conditions in paragraph .08 of HB 3475 for classifying anasset as held for sale affect an entitys accounting for foreclosedassets presumed to be held for sale under HB 3025, Impaired Loans?

Answer. HB 3475 effectively nullifies the provisions of old HB 3025,

Impaired Loans, on foreclosed assets. HB 3025 addressed the initial

accounting for a foreclosure and how an entity should subsequently

measure a foreclosed asset. Under the old standard, a rebuttable

presumption existed that an entity should account for a foreclosed asset

as held for sale on the premise that most entities do not intend to hold

foreclosed assets for the production of income. HB 3025 required anentity to measure a foreclosed asset classified as held for sale at the

lower of (a) fair value minus estimated costs to sell or (b) cost.

HB 3025, before amendments, included specific accounting requirements

for foreclosed assets. These were not the same as the accounting for

assets held for sale under HB 3475. The AcSB could see no conceptual

justification for having different accounting procedures for assets based on

how they were acquired, and viewed the existence of different accounting

methods for similar assets held for sale as incompatible with the

objectives of consistency and transparency. The AcSB consequently

decided to amend HB 3025 to make the accounting for foreclosed assetsconsistent with HB 3475.

Thus, the new standard significantly changes the practice for foreclosed

assets. Under revised HB 3025, an entity classifies a foreclosed asset as

held for sale at the date of foreclosure only if the asset meets the held-for-

sale conditions in paragraph .08 of HB 3475.

Q20. As a result of circumstances previously considered unlikely, an entitydecides not to sell an asset classified as held for sale. At what amountshould the entity reclassify the asset back to held and used?

Answer. Paragraphs .23 and .24 of HB 3475 address this question. If along-lived asset no longer meets the criteria to be classified as held for

sale, the entity reclassifies the asset to held and used on the date of the

subsequent decision not to sell. The entity reclassifies the asset at the

lower of its (a) carrying amount before the asset was classified as held for

sale, adjusted for any depreciation expense that would have been

recognized had the asset been continuously classified as held and used,



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or (b) fair value at the date of the subsequent decision not to sell. Any

required adjustment to the carrying amount of a long-lived asset that is

reclassified as held and used is included in income before discontinued

operations and extraordinary items in the period of the subsequent

decision not to sell. The adjustment is reported in the same income

statement caption used to report a loss, if any, recognized for a long-lived

asset that is classified as held for sale but is not reported as a

discontinued operation. If a component of an enterprise is reclassified as

held and used, the results of operations of the component previously

reported in discontinued operations are reclassified and included inincome before discontinued operations and extraordinary items for all

periods presented.

The entity also must disclose in the notes to the financial statements that

include the period of the retention decision, the facts and circumstances

leading to the decision to change the plan to sell the long-lived asset, and

the effect on the results of operations for the period and any prior periods

presented.

Q21. An entity adopts a formal plan to dispose of substantially all of itsassets and the remaining operations are insignificant. May the entity

account for the discontinued activities as discontinued operations?

Answer. No. In accordance with EIC-45, Discontinued Operations, the

discontinued operations accounting should not be adopted when, as a

result of the adoption of a formal plan of disposal, the entity has no

substantial continuing operations. The objective of presenting

discontinued operations is to segregate the results that have been

discontinued from the results of continuing operations. When there are

non significant operations, such segregation is not appropriate. If an entity

intends to recommence operations in the future but is inactive at the

financial statement date, it would not be considered to have substantial

continuing operations.

However, the entity needs to apply HB 3475 if the criteria in paragraph .08

are met even though the presentation in the financial statements will not

follow the requirements of HB 3475.



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Section 5 Measurement of an Asset orDisposal Group Classified as Held for Sale


HB 3475 requires an entity to measure an asset (disposal group) classified

as held for sale at the lower of its carrying amount at the date the asset

initially is classified as held for sale or its fair value less costs to sell.

HB 3475 describes costs to sell as the incremental direct costs to transact a

sale, that is, the costs that result directly from and are essential to a sale

transaction and that would not have been incurred by the enterprise had the

decision to sell not been made. Those costs include broker commissions,

legal and title transfer fees and closing costs the entity would incur to

transfer legal title. Note that if the sale is expected to occur beyond one

year, as permitted in limited situations by paragraph .09 of HB 3475, thecosts to sell are discounted.

HB 3475 also changes the impairment recognition and measurement model in

the old Section for a segment of a business. After an entity adopts HB 3475,

all asset groups held for sale will be measured at the lower of carrying amount

or fair value less costs to sell, including disposal groups that would have

qualified as a segment of a business under previous HB 3475. A gain should

be recognized for any subsequent increase in fair value less costs to sell, but

not in excess of the cumulative loss previously recognized for a write down to

fair value less costs to sell required by HB 3475.

The fair value less costs to sell measurement in HB 3475 significantly departs

from the previous net realizable value measurement in previous HB 3475.

Under previous HB 3475, an entity included estimated future operating losses

between the measurement date and the disposal date in the measurement of

an impairment loss. Under HB 3475, an entity must recognize the results of

operations of a disposal group classified as held for sale only in the period in

which they occur.

Costs to sell. Because costs to sell include only incremental direct

transaction costs, some costs that may have qualified as costs to sell under

previous standards no longer qualify under HB 3475. Most notably, costs thatwere required to be incurred under the terms of a contract for an assets sale

as a condition of the buyer, such as expected future losses to continue

operations during the holding period, no longer are included in the

measurement of an asset held for sale.


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Cessation of depreciation. An entity ceases depreciating a long-lived asset

when it reclassifies an asset from held and used to held for sale, even if the

asset continues to be used in operations or is part of a disposal group that

continues to generate revenues for the entity. The Board reasoned that

depreciation should cease even if the asset continues to be used in operations

because the decision to sell the asset indicates that the entity intends to

recover the assets carrying amount through sale, and not by continuing to use

the asset. In other words, the remaining use of the asset in operations is

incidental to the recovery of the carrying amount through sale.

Other assets within the disposal group that are not included in the scope of

this Section, as well as liabilities, are evaluated in accordance with generally

accepted accounting principles prior to determining any write-down of long-

lived assets within the scope of this Section.

Q22. Does the term costs to sell include amounts that the entity will payto its employees for finding a buyer or consummating the sale?

Answer. While HB 3475 does not explicitly address this issue, we believe

that internal costs (whether one-time or recurring costs) should not be

included as costs to sell for purposes of the fair-value-less-costs-to-sell

measurement. Only incremental direct costs an entity will pay to an

unrelated party should be included as costs to sell.

Q23. When, if ever, is goodwill included in the carrying amount of a held-and-used long-lived asset group under HB 3475?

Answer. When a disposal group is a portion of a reporting unit that

constitutes a business, goodwill is allocated to the disposal group and

included in its carrying amount prior to determining any write-down.

Q24. How should an entity apply the mechanics of allocating a measured

impairment loss to the long-lived assets within an asset group?

Answer. An impairment loss that is required to be recognized under HB

3475 is allocated to only those long-lived assets within the asset group

that are included in the scope of the Section. An entity generally allocates

a measured impairment loss on a pro rata basis using the relative carrying

amounts of those assets. However, the entity should consider whether

there are any individual long-lived assets within the group for which fair

value can be determined without undue cost and effort and for which fair



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value is greater than the adjusted carrying values after the pro rata

allocation. If so, the entity increases the adjusted carrying value for that

asset to its fair value and allocates the excess impairment loss to the

other long-lived assets in the group based on their adjusted carrying values

after the preliminary pro rata allocation.

Q25. Should an entity include the accumulated foreign currency translationadjustments (CTA) as part of the carrying amount of its consolidatedsubsidiary or equity method investment when evaluating theinvestment for impairment if the entity has committed to a plan to

dispose of the investment in a transaction that will cause the CTA to bereclassified to earnings?

Answer. In the US, the EITF addressed this question in EITF Issue No. 01-5,

Application of FASB Statement No. 52 to an Investment Being

Evaluated for Impairment That Will Be Disposed Of. The Emerging Issues

Task Force reached a consensus that if an entity commits to a plan that will

cause the CTA for an equity method investment or consolidated

investment in a foreign entity to be reclassified to earnings, the entity

should include the CTA as part of the carrying amount of the investment

when evaluating that investment for impairment. The Task Force also

reached a consensus that an entity should include the portion of the CTA

that represents a gain or loss from an effective hedge of the net

investment in a foreign operation as part of the carrying amount of the

investment when evaluating that investment for impairment if it has

committed to a plan to dispose of the net investment. The Canadian

literature does not address this issue. However, we believe that the above

guidance also applies in Canada.



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Section 6 Income Statement Reportingof Discontinued Operations

Paragraph .27 of HB 3475 requires an entity to report in discontinued

operations the results of operations of a component of an entity that either

has been disposed of or is classified as held for sale if:

(a) The operations and cash flows of the component have been (or will be)

eliminated from the ongoing operations of the entity as a result of the

disposal transaction, and

(b) The entity will not have any significant continuing involvement in the

operations of the component after the disposal transaction.

Paragraph .28 of HB 3475 states that 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. Therefore, a

component of an entity may be a reportable segment or an operating

segment (as those terms are defined in HB 1701, Segment Disclosures, a

reporting unit (as that term is defined in HB 3062, Goodwill and Other

Intangible Assets), a subsidiary or an asset group (as that term is defined in

HB 3063, Impairment of Long-Lived Assets).

HB 3475 includes three examples of when a component of an entity that an

entity plans to sell does not qualify for discontinued operations:

An entity intends to franchise company-owned restaurants. After the

entity sells the restaurants to the franchisee, the entity will earn fees and

royalties under the franchise agreement. HB 3475 indicates that the

franchise agreement is continuing involvement in the cash flows and

operations of the restaurants after their sale and, therefore, the entity

cannot present the restaurants as discontinued operations.

An entity plans to sell a manufacturing facility, however, the entity will

source through external parties and continue to market the same

products produced in the facility. HB 3475 indicates that the entity

should not present the operations of the facility as discontinued

operations because the cash flows of the related business will not beeliminated when it sells the facility.

An entity (retailer) plans to close two stores in the same region and open

a new superstore in that region. HB 3475 indicates that the entity will

not eliminate the operations and cash flows of the two retail stores from

its ongoing operations and, therefore, the entity should not present the

stores as discontinued operations.


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An entity must report in discontinued operations, in the period(s) in which they

occur, the results of operations of a component of an entity classified as held

for sale. If a disposal group qualifies for display as discontinued operations, an

entity reports the results of operations of the group for current and prior

periods, including any gain or loss on the disposition, as discontinued

operations in its income statement. The entity displays the results of

discontinued operations, less applicable income taxes (benefit), as a separate

component of income before extraordinary items.

The requirement to report as discontinued operations a disposal group thatmeets the definition of a component of an entity if no continuing involvement

exists presents many practical challenges. For example, some entities have

questioned whether a discontinued operations display provides useful

information to the users of the financial statements if dispositions of that type

occur in the ordinary course of business, perhaps because the entity has a

portfolio of similar assets or operations. Refer to section 9 of this Guide for a

discussion of these issues for real estate entities.

Q26. Can a disposal group that does not include assets within the scope ofthe impairment provisions of HB 3475 (because the impairment of

those assets is addressed by other generally accepted accountingprinciples) be a component of an entity under paragraph 28?

Answer. Yes. Assets or groups otherwise outside the scope of HB 3475

for impairment recognition and measurement may represent a component

of the entity and, if the asset or group meets the conditions in paragraph

.27, qualify for discontinued operations display.

Q27. At what date should an entity consider operations to be disposed of(and report the operation as discontinued under HB 3475) if the entitysdisposal strategy is to run-off the operation by ceasing to accept newbusiness and contract or regulation obligates the entity to continue toprovide services under existing contracts for a specified period?

Answer. For an abandonment of a component of an entity that an entity

initiates after adopting HB 3475, we believe that the entity should not

report the component as discontinued operations until all operations,

including run-off operations, cease.



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Q28. Can a stand-alone equity method investment that an entity sells orotherwise disposes of represent a component of an entity under HB3475?

Answer. No. In the U.S., the FASB clarified that an entity should not

report the disposal of an equity method investment, by itself, as a

discontinued operation under Statement No. 144. The scope of HB 3475

excludes long-term investments, including investments in equity

securities accounted for by the equity or cost method. Further, the

operations related to an equity method investment (that is, the investors

share of the earnings or losses of the investee entity) are not sufficient toestablish a component of the investor entity as defined in paragraph .27

of HB 3475. (Note that this conclusion is inconsistent with the fact that an

equity method investment might be a segment under HB 1701.)

However, an entity should report all of the operations of a component in

discontinued operations. Therefore, if a component of an entity has

operations that include, but are not limited to, operations related to an

equity method investment or any other asset excluded from the scope of

HB 3475, the total operations of the component should be reported as

discontinued operations if it meets the conditions in paragraph .28.

Q29. Does the term component of an entity apply to disposals in thenormal course of business, such as sales of commercial real estateproperties by a real estate investment trust (REIT) or restaurantlocations by a fast-food chain?

Answer. Prior to Statement No. 144, U.S. GAAP had a similar definition of

discontinued operations to that in Canada. In their deliberations on

Statement No. 144, the FASB observed that disposals that do not meet

the definition of discontinued operations might have a significant effect on

the enterprises ongoing operations and that broadening the reporting of

discontinued operations would improve the information provided to the

users. The FASB discussed this issue in response to concerns raised byconstituents that Statement No. 144 could require entities to present

disposals in the ordinary course of business as discontinued operations.

Those constituents believe that displaying routine disposals as

discontinued operations could be confusing to financial statement users.

In part, those constituents observed that income from continuing

operations for prior periods changes each time an entity disposes of or

classifies a new component as held for sale. In addition, discontinued

operations display of the components current and prior period operating



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results suggests a permanent contraction of the entitys business.

However, in many cases, the entity intends to invest the proceeds

received from the disposition in replacement operations or new real-

estate properties.

The FASB concluded that constituents had not identified new issues

creating a need to reconsider the requirements of Statement No. 144. The

FASB clarified that a principal objective of Statement No. 144 is to improve

the usefulness of reported financial information by broadening the

reporting of discontinued operations to include more disposal

transactions. Discontinued operations are no longer limited to the disposal

of a component of an entitys operations that comprises a separate major

line of business and that results from a change in business strategy.

However, the FASB reiterated that an entity is not required to apply the

requirements of Statement No. 144 for reporting discontinued operations

to immaterial items.

The FASBs position on this issue represents a reversal of its position in

the Exposure Draft that preceded Statement No. 144. Under that

Exposure Draft, discontinued operations would have included only

significant components of an entity and would have distinguished a

disposal of a significant component of an entity from activities incident to

the evolution of the business. While the FASB addressed this issue in the

context of property sales by REITs, we do not believe that the FASB

answer on the issue is industry-specific. Refer to section 9 of this Guide

for further discussion.

We believe that GAAP in Canada in consistent with U.S. GAAP in this

regard.

Q30. How should an entity assess whether a disposition of a component ofan entity is sufficiently immaterial not to require presentation as a

discontinued operation?

Answer. We believe that an entity should consider all aspects of the

components effect on the entitys financial statements when evaluating

whether the component of an entity is sufficiently immaterial not to

require presentation as discontinued operations, assuming that the group

otherwise meets the other conditions in HB 3475 for that reporting. The

entity should consider the relationship to the same measures for the total

entity in the current and past periods presented in the entitys financial

statements of the components revenue, gross profit, operating income,



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net income and total assets. We believe that the evaluation should include

the effect of the gain or loss on the sale of the component.

We also believe that the only operational approach to evaluating whether a

disposal is sufficiently immaterial is for an entity to perform the

assessment on a disposition-by-disposition basis. However, any single

evaluation should consider the degree of frequency of similar dispositions

the entity expects in future periods.

Q31. Can a component of an entity be smaller than an asset group towhich the entity applies the provisions of HB 3475 for evaluatingimpairment of assets held and used?

Answer. No. While HB 3475 does not specifically address this question,

we believe that the Section does not support a conclusion that a

component of an entity can be a level lower than the entitys groups for

assets held and used.

Paragraph .03 (a) implicitly states that the unit of accounting for a long-

lived asset is its group, and that an asset group held and used represents

the lowest level for which identifiable cash flows are largely independent

of the cash flows of other groups. Paragraph .28 of HB 3475 states that 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.

Thus, if a disposal involves less than a held-for-use asset group, the

disposal asset or unit cannot meet the definition of a component of an

entity. That is, if the asset did not have largely independent cash flows

under HB 3063 for purposes of determining the held-for-use grouping

policy, it is highly unlikely that the asset comprises operations and cash

flows that can be clearly distinguished, operationally and for financial

reporting purposes, from the rest of the entity.

Q32. Do the provisions of HB 3475 on the reporting of discontinuedoperations apply to dispositions of oil and gas properties withidentifiable cash flows if the entity uses the full-cost method ofaccounting?

Answer. In accordance with AcG-16, Oil and Gas Accounting Full Cost,

a disposal of a sub-set of properties within a cost centre (oil and gas

activities of an enterprise within the geographical boundaries of a country;

there should be one and only one cost centre for each country in which



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an enterprise has oil and gas activities) should not be presented as a

discontinued operation as it will not meet the definition of a component,

as defined in paragraph .28 of HB 3475.

A disposal of an entire cost centre would meet the definition of a

component and should be presented as a discontinued operation in

accordance with HB 3475.

Q33. If an entity reports a component of an entity as discontinuedoperations, should the entity allocate general corporate overhead

expenses to that component in its separate display?

Answer. The EIC is developing a Draft Abstract to replace EIC-45. The

Draft (numbered D43, Discontinued Operation Allocation of Interest

and Other Accounting Matters) is based on EITF 87-24, Allocation of

Interest and Other Accounting Matters. Issue 2 of the Draft Abstract is as

follows: Should general corporate overhead be allocated to discontinued

operations? At its August 2004 meeting, the Committed reconfirmed its

consensus reached previously that general corporate overhead expenses

should not be allocated to discontinued operations. In the U.S., the EITF

addressed this question in connection with discontinued operations

reporting for segments of a business under Opinion 30. In EITF IssueNo. 87-24, Allocation of Interest to Discontinued Operations, the EITF

reached a consensus that an entity should not allocate general corporate

overhead to discontinued operations. The FASB staff has expressed its

view that the answer in Issue 87-24 is a relevant interpretation for

discontinued operations reporting under Statement No. 144. Given the

tentative consensus reached by the EIC and FASB staff views on the

subject, we believe that general corporate overhead expenses should not

be allocated to discontinued operations under Canadian GAAP.

Q34. If an entity makes a subsequent decision to retain a disposal group or

component classified as held for sale and reported as discontinuedoperations, how should the entity adjust its current and prior periodincome statements?

Answer. HB 3475 does not permit an entity to restate the financial

statements of a prior reporting period. That is, any impairment losses

recognized in that prior period while the asset was classified as held for

sale are not adjusted based on how the asset would have been

accounted for had it remained classified as held and used. In the reporting

period that includes the entitys decision to retain the disposal group or



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component, the entity reclassifies the results of operations of the

component in the prior period(s) (presented for comparative purposes)

from discontinued operations to continuing operations.

Q35. How is a long-lived asset or a disposal group accounted for if thecriteria are met after the balance sheet date but before issuance offinancial statements?

Answer. The long-lived assets or the disposal group continue to be

classified as held and used in those financial statements and the following

information should be presented in the notes to financial statements: adescription of the facts and circumstances leading to the disposal or

expected disposal, the expected manner and timing of the disposal, and,

the carrying amount(s) of the major classes of assets and liabilities

included as part of a disposal group. The entity should also consider the

requirements under HB 3820, Subsequent Events.

In a registration statement, pro forma financial statements should be

presented to give effect to the actual or probable disposition, if significant.

Q36. How should an entity present earnings per share if it reports

discontinued operations under HB 3475?

Answer. The entity should report basic and diluted earnings per share

data for income from continuing operations, income from discontinued

operations and net income. HB 3475 did not amend HB 3500, Earnings

per Share. Paragraph .61 of HB 3500 requires an entity to present basic

and diluted earnings per share data for income from discontinued

operations (and extraordinary items) either on the face of the income

statement or in the notes to the financial statements. Paragraph .60 of

HB 3500 requires that an enterprise present basic and diluted per share

data for income from continuing operations and net income on the face of

the income statement.



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Q37. How should an investor report in its income statement its share of adiscontinued operation that the investee reports in its separatefinancial statements?

Answer. Paragraph .14 of HB 3050 requires that the investors

proportionate share of any discontinued operations, extraordinary items,

changes in accounting policy, corrections of errors relating to prior period

financial statements or capital transactions of the investee are disclosed

separately, according to their nature, in the investors financial statements.

Q38. How should an entity that reports a majority-owned subsidiary as adiscontinued operation present the minority shareholders portion ofthe subsidiarys earnings (the entity previously presented the minorityshareholders portion of the subsidiarys earnings as a minorityinterest charge in its consolidated income statement)?

Answer. The entity should include the minority interest charge as part of

discontinued operations for the income statement periods presented. The

minority interest charge was a component of the entitys income from the

subsidiarys operations and should be included in the discontinued

operations display along with the consolidated revenues and expenses of

the majority-owned entity that previously also were included in income

from continuing operations.



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Section 7 Reporting Impairment Losseson Assets Held and Used and Disposal

Gains or Losses in Continuing OperationsHB 3475 requires an entity to report impairment losses on assets held and

used and disposal losses and adjustments thereto for assets or groups that

did not qualify as discontinued operations as a component of income or loss

from continuing operations before income taxes. Therefore, if an entity

presents a subtotal such as income from operations, it must include the

amount of the impairment or disposal loss and adjustments thereto (for assets

held for sale) in that subtotal.

Q39. How should an entity classify in its income statement a gain that it

recognizes on the sale or other disposal of a long-lived asset or groupnot reported as discontinued operations?

Answer. The financial statements should disclose, if not separately

presented on the face of the income statement, the amount of gain or

loss on disposal and the caption in the income statement that includes

that gain or loss.


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EIC-41, Presentation of Assets and Liabilities Held for Disposal, did not

permit an entity to offset the assets and liabilities of a segment of a business

for which the entity had committed to a plan of disposal. That is, the assets

and liabilities the entity expected to transfer in the disposal were not offset

and presented as a single-line item in the entitys balance sheet.

Similarly, HB 3475 requires an entity to present a long-lived asset classified as

held for sale separately in the balance sheet. The Section also requires an

entity to present separately in the asset and liability sections, respectively, of

the balance sheet, the assets and liabilities of a disposal group classified asheld for sale.

Paragraph .37(a) of HB 3475 requires an entity to disclose either on the face

of the balance sheet or in the notes to the financial statements the major

classes of assets and liabilities classified as held for sale.

Q40. Should an entity classify assets and liabilities of a disposal group heldfor sale as current or noncurrent in the balance sheet?

Answer. Guidance on this point is provided in paragraph .35 of HB 3475

which states that long-lived assets classified as held for sale would not be

reclassified as current assets, unless the enterprise has sold the assets

prior to the date of completion of the financial statements and the

proceeds of the sale will be realized within a year of the date of the

balance sheet or within the normal operating cycle if that is longer than a

year. If the assets have been classified as current assets due to

subsequent sale, any liabilities to be assumed by the purchaser or

required to be discharged on disposal of the assets would be classified as

current assets.

Section 8 Balance Sheet Presentationand Disclosure of Composition of a Disposal

Group Classified as Held For Sale


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Section 9 Issues Related to DiscontinuedOperations Reporting For Real Estate Entities


Real estate entities have various types of property dispositions that raise

questions about whether the disposition qualifies for reporting as a

discontinued operation under HB 3475. The dispositions that are discussed

herein address properties or entities that have identifiable cash flows that are

largely independent of other assets and, therefore, represent an asset group

under HB 3475. While Questions 46 through 48 arise frequently for - and thus

are framed in terms - of real estate entities, they have broader applicability

beyond the real estate industry.

Q41. Should a build-to-suit property that was constructed for a knownbuyer under a contract whereby the entire purchase price of theproperty was funded at closing be reported as a discontinuedoperation?

Answer. No. The costs incurred under the contract are similar to inventory

costs. HB 3475 did not amend or nullify HB 3030, Inventories, which

provides authoritative guidance on inventory impairment. HB 3400,

Revenue, provides guidance about how a contractor should account for

performance under the contract. HB 3475 does not affect properties

constructed pursuant to contracts with unrelated parties that are

accounted for under completed contract or the percentage of completion

methods or the manufacture of goods for sale accounted for under HB3030.

Q42. An entity constructs a building that it classifies as held for sale whenconstruction is complete.The entity sells the building within arelatively short time (for example, three months) of completing theconstruction but before leasing any of the space to tenants, and hasno continuing involvement with the operations of the building afterthe sale. Should the entity report the building as a discontinuedoperation when it classifies the building as held for sale?

Answer. No. The building does not qualify as a component of an entity

under paragraph .28 of HB 3475 because the building has no associated

revenues at the time it is classified as held for sale. In addition, no

revenues commenced during the holding period. Therefore, the building

does not have operations, as that term is used in paragraph .28 of HB

3475. This conclusion presumes that costs incurred and charged to the

income statement during the holding period for the building are

insignificant.


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Q43. An entity constructs a commercial office building with the intent ofselling its full interest in the building after tenants occupy a significantpercentage of the space.The entity is successful in attracting tenantsquickly and within three months has leased approximately 70 percentof the building.The entity begins to search for a buyer.Three monthslater, the entity finds a buyer and shortly thereafter sells its entireinterest in the building; it has no continuing involvement with theoperations of the building after the sale.The entity met therequirements in paragraph .08 of HB 3475 for held-for-saleclassification just before it sold the building and, as a result,depreciated the building for a short period. Should the entity reportthe building as a discontinued operation when it is classifies the

building as held for sale?

Answer. Yes. The entity should report the building as a discontinued

operation from the date the building is classified as held for sale because

the requirements in paragraphs .27 and .28 of HB 3475 are met. The

building meets the definition of a component of an entity as the cash

flows from the property can be clearly distinguished from the rest of the

entity. The operations and cash flows of the component have been

eliminated and the entity will have no continuing involvement with the

buildings operations after the sale. Discontinued operations reporting is

not required, however, if the disposition is immaterial to the entity. Refer

to Question 30 for a discussion of materiality.

Q44. In a variation on the fact pattern in Question 43, the entity met therequirements in paragraph .08 of HB 3475 for held-for-saleclassification at the time the building was ready for tenants and, as aresult, the entity did not depreciate the building during the time thatthe building was being leased up. Should the entity report thebuilding as a discontinued operation when it classifies the building asheld for sale?


operation when it classifies the building as held for sale for the same

reasons discussed in the response to Question 43. Only the timing of that

classification as held for sale is different. That is, the building is classifiedas held for sale at the time construction is complete, whereas in Question

43, the held-for-sale classification did not occur until later.



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Q45. An entity buys a building that it intends to refurbish while it is leasedto tenants, and then sell. Shortly after the refurbishment is complete,the entity sells its entire interest in the building to an unrelated partyand has no continuing involvement with the operations of thebuilding after the sale.The entity met the requirements in paragraph.08 of HB 3475 for held-for-sale classification just before it sold thebuilding and, as a result, it depreciated the building from the date ofacquisition until the date the building qualified as held for sale.Should the entity report the building as a discontinued operationwhen it classifies the building as held for sale?


operation from the date the building is classified as held for sale because

the requirements in paragraphs .27 and .28 of HB 3475 are met. The

building meets the definition of a component of an entity, as the cash

flows from the property can be clearly distinguished from the rest of the

entitys operations. After the sale occurs, the operations and cash flows of

the component are eliminated and the entity has no continuing

involvement with the operations of the building. Discontinued operations

reporting is not required, however, if the disposition is immaterial to the

entity. Refer to Question 30 for a discussion of materiality.

Q46. Should an entity that sells a majority of its interest in a previously

controlled (consolidated) entity whose primary asset is a commercialoffice building report the building as a discontinued operation if itaccounts for the retained minority interest in the entity using theequity method?

Answer. No. The disposition of a majority of an interest in a previously

controlled or wholly-owned entity does not qualify for discontinued

operations reporting if the retained minority interest provides the seller

with significant influence over the transferred entity. That is, the conditions

in paragraph .27 of HB 3475 are not met because the entity will continue

to have cash flows from its retained interest and will continue to be

involved with the operations of the building through its position of

significant influence.



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Q47. Should an entity that sells a majority of its interest in a previouslycontrolled (consolidated) entity whose primary asset is a commercialoffice building report the building as a discontinued operation if itaccounts for the retained minority interest in the entity under thecost method?

Answer. The answer depends on the materiality of the expected future

cash flows from the retained minority interest. If expected future cash

flows clearly are significant to the entity, then the entity should not report

the disposition as a discontinued operation. If those cash flows clearly will

be insignificant, the disposition should be reported as a discontinued

operation. Judgment will be required to determine the appropriate

reporting.

Q48. Should a real estate entity that sells a building (either newconstruction or a building that it previously operated) to an equitymethod investee report the building as a discontinued operation?

Answer. No. The entity should not report the building as a discontinued

operation because the seller has continuing involvement with the building

through its equity method investment in the buyer. That is, the conditions

in paragraph .27 of HB 3475 are not met because the entity will continue

to participate in the cash flows from the building through its investment inthe buyer and will continue to be involved with the operations of the

building through its position of significant influence.

Q49. Should a real estate entity that sells its entire interest in a building(either new construction or a building that it previously operated) toan unrelated third party concurrent with entering into an agreementto manage the building for the new owner for a fee commensuratewith current market conditions report the building as a discontinuedoperation?

Answer. No. Even though the entity sold its entire interest in the building,

it has not eliminated the cash flows associated with the building from its

ongoing operations and has significant continuing involvement in the

buildings operations after the sale through the management agreement.

Accordingly, the entity should not report the building as a discontinued

operation because the conditions in paragraph .27 are not met.



38/41


In situations in which there is continuing involvement, all facts and

circumstances need to be analyzed to determine the appropriate

reporting. Discontinued operations reporting would be appropriate if the

management agreement was only for a short period of time (such as 30

days) and the continuing involvement was eliminated within 12 months

from the date at which the entity classified the building as held for sale. In

that case, the entity would report the building as a discontinued operation

when the management agreement terminated.



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Section 10 Transition


HB 3475 applies to disposal activities initiated by an enterprises commitment

to a plan on or after May 1, 2003. Early application is encouraged. An entity

that elects early adoption applies the Recommendations of this Section

retroactively to the beginning of its current fiscal year and restates prior

interim data of that year. Long-lived assets classified as held for disposal as a

result of disposal activities that were initiated before the initial application of

the Section continue to be accounted for and displayed in the entitys income

statement in accordance with prior pronouncements applicable to that

disposal. Therefore, an entity will not report discontinued operations for asset

groups initially classified as held for sale under previous requirements of HB3475 that the entity sells after it adopts HB 3475.

An asset or disposal group that is not accounted for as held and used at the

date of initial application of HB 3475 is reclassified as held and used in

accordance with paragraph .23 if the six criteria in paragraph .08 are not met

by the end of the fiscal year in which HB 3475 initially is applied. Any gain or

loss is reported in income before discontinued operations.

Q50. Should an entity that reported discontinued operations under HB 3475before its amendment for an operation being abandoned through run-

off reclassify the operations to continuing operations in its incomestatement if the conditions in paragraph .08 of HB 3475 are not met atthe end of the fiscal year of adoption?

Answer. No. The one-year transition provision in paragraph .42 of HB

3475 does not apply to an abandonment involving a segment of a

business reported as discontinued operations under HB 3475, before

amendments, when the entity is effecting the abandonment through a

run-off of operations. Therefore, the entity continues to report the

segment as discontinued operations under HB 3475, before

amendments, for the remaining run-off period.


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Acronyms Defined

AcG Accounting Guideline (CICA)

AcSB Accounting Standards Board (CICA)

AICPA American Institute of Certified Public Accountants

CEO Chief Executive Officer

CICA Canadian Institute of Chartered Accountants

CON Statement of Financial Accounting Concepts

EIC Emerging Issue Committee

EITF Emerging Issue Task Force (FASB)

FASB Financial Accounting Standard Board (U.S.)

GAAP Generally Accepted Accounting Principles

HB Handbook Section (CICA)

IASB International Accounting Standards Board

SAB Staff Accounting Bulletin (U.S.)

SEC Securities Exchange Commission

SOP Statement of Position

US United States


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