Accounting Issue Using Accounting Standards Codification - Essay Example

? RESEARCH ISSUE The research has been made on an accounting issue using Accounting Standards Codification (ASC). Thousands of pronouncements of US GAAP have been recognized by the Codification into several accounting topics and has displayed those topics in a consistent structural manner. It also includes the guidance of US Securities and Exchange Commission (SEC) following the similar structure of topics with separate sections incorporated into the Codification. The accounting issue here is pertaining to ABC Company who has six major divisions and has decided to sell off its mining division. The rationale behind treating this division as discontinued operation and held for sale has been discussed here and reporting of the position of financial statement for such division has been explained. A component of an entity can be considered discontinued operation if it does not have any involvement with the operation of the component after the disposal transaction. The sale of such asset or disposal group is probable or likely to occur and the transfer of such asset is expected to qualify for recognition as a complete sale within one year. Again the sale has been actively marketed at a reasonable price in relation to its current fair value. The period in which such transaction has occurred, the income statement of a business entity or statement of activities for not-for-profit entity (NFP) for current and prior periods should report the result of operation of component along with the gain or loss recognized in discontinued operations. The result of operation of a component of an entity either been disposed of or classified as held for sale will be reported in discontinued operations on the fulfilment of following conditions: On occurrence of the disposal transaction, the operation and cash flow of the component is required to be eliminated from the continuing operations of entity. Further, the entity is not required to have continuing involvement with the operation of the component after such disposal transaction. In a period in which the component of entity which has been disposed of or classified as held for sale, the income statement of the business entity or statement of activities of not-for-profit (NFP) entity should have the result of operation of component and gain or loss incurred in discontinued operations. The result for discontinued operation less income taxes applicable should be reported as a separate component of income before extraordinary items. Any adjustment to any amounts that has been previously reported under discontinued operations and is directly related to the disposal transaction in prior period is required to be separately classified under discontinued operations in current period. Such type of adjustments may arise in circumstances like resolution of adjustment of purchase price, retaining of product warranty and environmental obligations by seller, settlement of obligations of employee benefit plan provided the settlement should be related directly to the disposal transaction if there is a demonstrated relationship of direct cause and effect and the disposal should occur within one year following the disposal transaction unless delayed by circumstances beyond the control of entity. The business memorandum entailing the underlying principle for mining division of ABC Company which is to be sold off has been enclosed. BUSINESS MEMORANDUM ABC COMPANY MEMORANDUM TO: MATT ROGERS, CFO FROM: STAFF ACCOUNTANT DATE: 6/3/2013 SUBJECT: REPORTING OF MINING DIVISION INTRODUCTION It is known that ABC Company having six major divisions has recently decided to sell off its mining division. The company is actively seeking a buyer and has priced the division at fair value of the division’s assets and liabilities and it expects that the division will be sold during the next fiscal year. However, the division has been considered an operating segment; this memorandum entails the details of reporting the mining division in financial statement. BODY Research has been made on this issue from Accounting Standards Codification. Accounting Standards Codification has defined a component of an entity as the one that comprises cash flows and operations which can be distinguished clearly from the rest of the entity for operational and financial reporting purposes. A component of an entity can be a reportable unit, reportable segment, operating segment, a subsidiary or an asset group. Once the mining division of ABC Company will be sold, ABC will have no involvement with the operation of the division. Thus, the mining division can be considered discontinued operations. In such a situation, the accounting of the transaction should be for as the disposal of a group of assets, not being a component of an entity. The management of ABC Company has decided to sell off its mining division and it has initiated steps to locate a buyer and to make the sale process complete. In such a context, it is appropriate to consider this division as held for sale.i The result of operation of a component classified as held for sale should be reported in discontinued operation in the respective period when it occur. Reporting of the result of discontinued operation in the income statement of ABC Company should be in the following manner:- The assets and liabilities of the mining division classified as held for sale is required to be shown separately in the asset and liability section of the respective financial position statement. Those assets and liabilities should not be offset and presented as a single amount. Assets and liabilities classified as held for sale shall be separately disclosed on the face of statement of financial position or in the form of notes to financial statements.ii CONCLUSION A long lived asset or a disposal group to be sold off can be classified as held for sale in the period if it meets criteria like management holding authority of approving action decides to sell the asset or disposal group. Such asset or disposal group is available for immediate sale in its present condition subjected to usual and customary condition for sale of such assets. As an outcome of the disposal transaction, the operation and cash flow of component will be eliminated from the running operations of entity and also it will not have continuous involvement significantly with the operation of component after such transaction. REFERENCES FASB Accounting Standards Codification. Web. March 06,2013. Read More