Discontinued operations accounting
Apply the strategic-shift test, calculate the net-of-tax result, and practice discontinued operations with free FAR questions.
The decision that earns the point
Classify the item before measuring it
A disposed or held-for-sale component is reported in discontinued operations only when its disposal represents a strategic shift that has a major effect. The qualifying component results and disposal effects are presented as a separate component of net income after continuing operations, net of tax.
Exam use
FAR can test whether the facts meet the discontinued-operation threshold, the amount included, intraperiod tax allocation, and presentation apart from continuing operations.
Your scratch-paper plan
Solve it in three moves
- 1
Identify a component
Confirm that the operation and its cash flows can be distinguished operationally and for financial reporting.
FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45 - 2
Prove the strategic shift
Require a major effect on operations and financial results instead of treating every disposal as discontinued.
FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45 - 3
Present the complete net amount
Combine only qualifying operating and disposal effects and present the related tax effect in the discontinued-operation component.
FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45
Worked problem
Work the facts before choosing the answer
CPAPass illustration assumptions: a disposed component meets the ASC 205-20 definition and strategic-shift threshold. Its entire current-period pretax discontinued-operation loss is $60,000 and the related intraperiod tax benefit is $15,000.
CPAPass original exam illustration using stated assumptions
Show the work
The separate after-tax discontinued-operation loss is $45,000: the $60,000 pretax loss less the $15,000 related tax benefit.
Rule source: FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45Answer
Present a $45,000 discontinued-operation loss, net of tax, as a separate component of net income after continuing operations.
Rule source: FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45Do it now
Test the same decision with a fresh question
Start with free FAR practice. Create an account only when you want the 5-day no-card CPAPass trial and continued section practice.
The trap and the repair
Common trap
Treating any sold business, asset group, or product line as discontinued operations skips the strategic-shift and major-effect threshold.
Repair
Prove component, strategic shift, and major effect before calculating the separate net-of-tax amount.
Disposal reporting ladder
Held for sale and discontinued operations are different conclusions
A disposal can qualify for held-for-sale measurement without meeting the strategic-shift threshold for discontinued operations.
| Decision | Required fact | Reporting result | Authority |
|---|---|---|---|
| Component | Operations and cash flows are distinguishable from the rest of the entity | Eligible for the discontinued-operation threshold test | FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45 |
| Strategic shift | Disposal has a major effect on operations and financial results | Qualifies for discontinued-operation presentation | FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45 |
| No major strategic shift | Disposal does not meet the major-effect threshold | Do not label the result discontinued operations | FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45 |
| Qualifying presentation | Complete component result, disposal effects, and related tax | Separate net-of-tax component after continuing operations | FASB ASC 205-20-20, 205-20-45-1B through 45-3C, and 740-20-45 |
After a miss
Repair a discontinued-operation miss
- 1
Write component, strategic shift, and major effect as three separate gates and cite the fact that satisfies each one.
- 2
Recalculate the illustration after changing only the tax effect, then explain why classification does not change.
- 3
Answer a fresh FAR disposal question and state held-for-sale and discontinued-operation conclusions separately.
Your exam workflow
- Step 1Read the requirementIdentify what the task asks you to decide about discontinued operations accounting.
- Step 2Sort the factsConfirm that the operation and its cash flows can be distinguished operationally and for financial reporting.
- Step 3Apply the ruleRequire a major effect on operations and financial results instead of treating every disposal as discontinued.
- Step 4Check the outputCombine only qualifying operating and disposal effects and present the related tax effect in the discontinued-operation component.
Keep the next step narrow
Quick questions
What is the shortest useful answer for discontinued operations accounting?
A disposed or held-for-sale component is reported in discontinued operations only when its disposal represents a strategic shift that has a major effect. The qualifying component results and disposal effects are presented as a separate component of net income after continuing operations, net of tax.
How can discontinued operations accounting appear on the CPA Exam?
FAR can test whether the facts meet the discontinued-operation threshold, the amount included, intraperiod tax allocation, and presentation apart from continuing operations. The exact task can change, so identify the governing facts before applying the rule.
What is the most common mistake with discontinued operations accounting?
Treating any sold business, asset group, or product line as discontinued operations skips the strategic-shift and major-effect threshold. Prove component, strategic shift, and major effect before calculating the separate net-of-tax amount.
Where should I practice discontinued operations accounting?
After the worked example, use FAR practice for a fresh question that requires the same decision. If the miss depends on held-for-sale classification and measurement, review that handoff before trying another set.
How should I review discontinued operations accounting after a missed question?
Write component, strategic shift, and major effect as three separate gates and cite the fact that satisfies each one. Recalculate the illustration after changing only the tax effect, then explain why classification does not change. Answer a fresh FAR disposal question and state held-for-sale and discontinued-operation conclusions separately.