WEBVTT NOTE Discontinued operations 1 00:00:00.000 --> 00:00:06.152 You are listening to Reading 2-2 of the A C C 300 course reading: Discontinued operations. 2 00:00:06.152 --> 00:00:21.052 Follow Sable Ridge Instruments as it decides whether the sale of its veterinary-instrument line qualifies as a discontinued operation, measures the held-for-sale loss, allocates the related income tax, and presents the 3 00:00:21.052 --> 00:00:24.401 result on the income statement and balance sheet. 4 00:00:24.401 --> 00:00:37.456 The chapter then compares the 3M and O D P filings, explains unusual or infrequent items with the Linde and Turning Point Brands filings, and ends with a Meridian Home Services practice case. 5 00:00:37.456 --> 00:00:43.608 The written chapter shows the filing excerpts and gives feedback for each practice answer. 6 00:00:43.608 --> 00:00:55.621 Sable Ridge has sold veterinary instruments for 11 years. In August 2026, its board approved a plan to sell that entire line and leave the animal-health market. 7 00:00:55.621 --> 00:01:11.164 Sable will continue selling medical instruments after the sale. The controller must apply United States generally accepted accounting principles, or GAAP, to determine how Sable presents the veterinary line. 8 00:01:11.164 --> 00:01:26.255 Under GAAP, must Sable keep the result in continuing operations or present it below continuing operations? Moving recognized amounts into discontinued operations does not, by itself, change net income. 9 00:01:26.255 --> 00:01:41.197 It changes the income attributed to Sable's continuing business. If the line is also classified as held for sale, that classification can change measurement and stop depreciation, as Step 2 explains. 10 00:01:41.197 --> 00:01:48.480 You will use the classification, measurement, and presentation rules below to make that decision. 11 00:01:48.480 --> 00:02:00.746 Why financial statements separate some disposals. Investors and creditors use income from continuing operations to evaluate the business that will remain after the reporting date. 12 00:02:00.746 --> 00:02:13.628 If a company leaves a major market, combining that former business with the operations that remain can make the continuing subtotal a poor starting point for evaluating future performance. 13 00:02:13.628 --> 00:02:26.921 Separating every disposal would create the opposite problem. A company could move routine equipment sales, ordinary location closures, or losses from weak operations below continuing operations. 14 00:02:26.921 --> 00:02:39.598 The continuing subtotal would then look stronger even though those events arose from managing the business that continues. The discontinued-operations conditions balance those concerns. 15 00:02:39.598 --> 00:02:52.823 Separate presentation is reserved for an activity the company can distinguish, that has been disposed of or is genuinely held for sale, and whose departure marks a major change in the business. 16 00:02:52.823 --> 00:03:06.048 The conditions therefore protect the meaning of both sections: continuing operations describes the business that remains, and discontinued operations describes a major business that is leaving. 17 00:03:06.048 --> 00:03:15.521 Step 1: Determine whether the disposal qualifies. Apply the three conditions. The rule, discontinued operations. 18 00:03:15.521 --> 00:03:33.367 Report a disposed component, or one classified as held for sale, in discontinued operations only when the disposal represents a strategic shift that has or will have a major effect on the entity's operations and 19 00:03:33.367 --> 00:03:46.392 financial results. A S C Topic 205, Subtopic 20, Section 45, paragraphs 1A through 1C establish the component, disposal, and strategic-shift requirements. 20 00:03:46.392 --> 00:04:02.547 A S C Topic 205, Subtopic 20, Section 45, paragraph 1E supplies the held-for-sale criteria used in the second condition. Use the following decision tree in order. Stop at the first no answer. 21 00:04:02.547 --> 00:04:10.920 A component qualifies for discontinued-operations presentation only when all three answers are yes. 22 00:04:10.920 --> 00:04:20.484 Does the disposal qualify as a discontinued operation? Answer three questions in order. Question 1, distinguishable component. 23 00:04:20.484 --> 00:04:36.727 Can its operations and cash flows be distinguished from the rest of the entity for operating and reporting purposes? If no, report the result in continuing operations. If yes, continue. Question 2, disposal status. 24 00:04:36.727 --> 00:04:52.514 Has the component been disposed of, or does it meet the applicable held-for-sale criteria? If no, report the result in continuing operations. If yes, continue. Question 3, strategic shift with a major effect. 25 00:04:52.514 --> 00:05:05.418 Does the disposal represent a strategic shift that has or will have a major effect on operations and financial results? If no, report the result in continuing operations. 26 00:05:05.418 --> 00:05:09.744 If yes, present the component in discontinued operations. 27 00:05:09.744 --> 00:05:22.828 How to answer each question. The next three explanations follow the decision tree in order. Use each one to answer the matching numbered question before moving to the next question. 28 00:05:22.828 --> 00:05:33.671 Test 1: Identify a distinguishable component. A component has operations and cash flows that the entity can distinguish from the rest of the business. 29 00:05:33.671 --> 00:05:45.092 Start by defining the proposed component, then use the company's records to trace its: business activity: products or services and the customers who buy them. 30 00:05:45.092 --> 00:06:00.273 resources and obligations: employees, assets, and liabilities assigned to the activity. financial results: revenue, expenses, cash flows, and internal reports. The records do not have to be completely separate. 31 00:06:00.273 --> 00:06:15.597 The company must be able to use them to distinguish the component's operations and cash flows from the rest of the entity. A separate legal entity can provide evidence of that distinction, but it is not required. 32 00:06:15.597 --> 00:06:29.766 Management needs records that document the proposed boundary; a label alone is not enough. This boundary matters because the company will remove the component's results from continuing operations. 33 00:06:29.766 --> 00:06:44.367 If it can identify a revenue stream but cannot identify the people, costs, assets, obligations, and cash flows that support that revenue, it may remove only the favorable or visible part of an activity. 34 00:06:44.367 --> 00:06:58.608 The reported results of both the component and the remaining business would then be incomplete. The component test requires enough operating and reporting evidence to support a faithful separation. 35 00:06:58.608 --> 00:07:10.153 Test 1 example: Evaluate shared resources and records. A proposed component may share offices, software, employees, or administrative support with the rest of the company. 36 00:07:10.153 --> 00:07:17.985 Management cannot establish or rule out a component solely because it shares resources with the rest of the company. 37 00:07:17.985 --> 00:07:32.230 Management must determine whether the company can distinguish the proposed component's operations and cash flows for operating and reporting purposes. Pine Lake Advisory plans to sell its cybersecurity practice. 38 00:07:32.230 --> 00:07:39.252 Consultants work on both cybersecurity and finance projects, and the practices share one billing system. 39 00:07:39.252 --> 00:07:53.362 The company tracks revenue by engagement, but it has not identified the payroll, outside services, or other costs of the cybersecurity work. Management calls the practice a component. Check your understanding. 40 00:07:53.362 --> 00:08:07.135 Pine Lake tracks the cybersecurity practice's revenue but has not identified its people, costs, or other resources. Can management conclude that the practice is a component? Pause to consider your answer. 41 00:08:07.135 --> 00:08:21.516 Here is the explanation. The facts are not sufficient yet. Shared employees and systems do not prevent the practice from being a component, and Pine Lake does not need a separate record for every cost or resource. 42 00:08:21.516 --> 00:08:32.723 Management must determine whether its engagement, staffing, cost, and reporting records collectively allow it to distinguish the practice's operations and cash flows. 43 00:08:32.723 --> 00:08:41.365 If they do, Pine Lake must still test disposal status and whether the disposal represents a strategic shift with a major effect. 44 00:08:41.365 --> 00:08:50.007 Pine Lake cannot remove the cybersecurity revenue while leaving unidentified payroll and service costs in continuing operations. 45 00:08:50.007 --> 00:08:58.176 Doing so could overstate the cybersecurity practice's result and understate the performance of the business that remains. 46 00:08:58.176 --> 00:09:12.778 Test 2: Establish the disposal status. In Test 2, management evaluates whether the disposal has progressed far enough for the company to consider discontinued-operations presentation in the current period. 47 00:09:12.778 --> 00:09:25.813 The component must follow one of two routes as of the reporting date: Completed disposal: The company has sold, abandoned, or otherwise disposed of the component. Test 2 is satisfied. 48 00:09:25.813 --> 00:09:40.843 Sale planned but not completed: The company applies the held-for-sale criteria to the sale plan. If all six criteria below are met, the company classifies the component as held for sale, and Test 2 is satisfied. 49 00:09:40.843 --> 00:09:56.300 If neither route applies, stop the classification process. The company reports the component's current-period results in continuing operations. A plan to sell the component is therefore not a separate disposal status. 50 00:09:56.300 --> 00:10:09.050 The plan must meet all six criteria before the company can classify the component as held for sale. Together, the six criteria establish more than management's preference to sell. 51 00:10:09.050 --> 00:10:21.302 They show that authorized management is committed, the component is ready for sale, a realistic effort to find a buyer is underway, and completion is sufficiently probable. 52 00:10:21.302 --> 00:10:35.477 Classification and measurement should not change because of an announcement that the company has not begun to carry out, a price that buyers are unlikely to accept, or a plan management may withdraw. 53 00:10:35.477 --> 00:10:51.005 To determine whether the company may classify the component as held for sale under A S C Topic 205, Subtopic 20, Section 45, paragraph 1E, management must evaluate the sale plan against all of the following criteria as 54 00:10:51.005 --> 00:10:58.128 of the reporting date: Management with authority to approve the action has committed to a sale plan. 55 00:10:58.128 --> 00:11:13.800 The component is available for immediate sale in its present condition, subject only to usual terms for selling such a component. The company has started an active program to find a buyer and complete the sale plan. 56 00:11:13.800 --> 00:11:23.057 The sale is probable and is expected to qualify as a completed sale within one year, except when a permitted exception applies. 57 00:11:23.057 --> 00:11:37.271 The company is actively marketing the component for sale at a price that is reasonable in relation to its current fair value. A significant change to the plan, or withdrawal from it, is unlikely. 58 00:11:37.271 --> 00:11:47.184 A board-approved plan meets only the first criterion. The company cannot classify the component as held for sale until it meets all six. 59 00:11:47.184 --> 00:12:01.422 Test 3: Evaluate the strategic shift and its effect. Test 3 asks two separate questions: Does the disposal change what the remaining business does? Compare the entity before and after the disposal. 60 00:12:01.422 --> 00:12:14.576 Identify any major products, services, customers, markets, geographical areas, or operating activities that the entity will leave. Does that change have a major effect on the entity? 61 00:12:14.576 --> 00:12:29.971 Evaluate the effect on both operations and financial results relative to the entity as a whole. Both answers must be yes. A strategic shift describes a major change in the business that remains after the disposal. 62 00:12:29.971 --> 00:12:43.414 For example, leaving a major product line or market may represent a strategic shift. Selling one location while continuing to offer the same services to the same market usually does not. 63 00:12:43.414 --> 00:12:54.328 The size of the gain or loss does not answer the first question. A company can recognize a large loss on a property sale without changing its business. 64 00:12:54.328 --> 00:13:02.134 Nor does management's description of a disposal as "strategic" establish that the change has a major effect. 65 00:13:02.134 --> 00:13:15.143 Test 3 keeps those events in continuing operations unless the disposal changes a major part of the business and significantly affects the entity's operations and financial results. 66 00:13:15.143 --> 00:13:21.648 The following evidence helps identify whether the disposal changes the remaining business. 67 00:13:21.648 --> 00:13:38.480 The evidence table has three columns, the decision area, evidence of a strategic shift, and evidence of limited change. Products or services. A strategic shift when the entity leaves a major product or service line. 68 00:13:38.480 --> 00:13:52.884 Limited change when the entity continues offering the same products or services. Customers or markets. A strategic shift when the entity stops serving a major customer group or market. 69 00:13:52.884 --> 00:14:05.880 Limited change when the entity serves the same customers from its remaining operations. Geography. A strategic shift when the entity leaves a major geographical area. 70 00:14:05.880 --> 00:14:21.850 Limited change when the entity sells one location but remains in the same area. Operating structure. A strategic shift when the entity eliminates a major division, workforce, or group of operating assets. 71 00:14:21.850 --> 00:14:28.896 Limited change when the entity moves the work or capacity to another part of the business. 72 00:14:28.896 --> 00:14:42.530 After identifying a change, assess whether its effect is major relative to the entity as a whole. Quantitative evidence may include the component's revenue, profit or loss, assets, and cash flows. 73 00:14:42.530 --> 00:14:55.815 Qualitative evidence may include leaving a major market or eliminating a major operating division. GAAP provides no fixed percentage cutoff, so management must evaluate the evidence together. 74 00:14:55.815 --> 00:15:09.797 If either answer is no, the company reports the result in continuing operations. If both answers are yes, the component satisfies the third and final condition for discontinued-operations presentation. 75 00:15:09.797 --> 00:15:21.761 Check your understanding. A company sells one of six warehouses. The warehouse has separate cost records, but the company will serve the same customers from the other five. 76 00:15:21.761 --> 00:15:35.673 Does the sale qualify as a discontinued operation merely because the warehouse is a component? Pause to consider your answer. Here is the explanation. No. Separate records are evidence of a component. 77 00:15:35.673 --> 00:15:42.768 Management must still determine whether the disposal represents a strategic shift with a major effect. 78 00:15:42.768 --> 00:15:50.976 Because the company continues the same business, management should report the warehouse sale in continuing operations. 79 00:15:50.976 --> 00:15:53.434 Apply the conditions to Sable Ridge. 80 00:15:53.434 --> 00:16:06.204 Use the following facts for the complete classification analysis: In August 2026, Sable's board approved a plan to sell the veterinary- instrument line and leave the animal-health market. 81 00:16:06.204 --> 00:16:18.633 The veterinary line has its own products, customers, sales staff, and cost records. Sable can distinguish its operations and cash flows from those of the medical-instrument business. 82 00:16:18.633 --> 00:16:22.662 By September 30, the line was available for immediate sale. 83 00:16:22.662 --> 00:16:33.998 Sable had hired a broker, started seeking a buyer, and was actively marketing the line at a price that was reasonable in relation to the broker's fair-value estimate. 84 00:16:33.998 --> 00:16:46.836 Sable expected to complete the sale in the first quarter of 2027 and had taken no action to change or withdraw the plan. The veterinary line contributed 18 percent of Sable's 2025 revenue. 85 00:16:46.836 --> 00:16:52.436 Sable will continue selling medical instruments after the veterinary line is sold. 86 00:16:52.436 --> 00:17:02.064 Apply the three conditions to those facts: Can Sable distinguish the veterinary line's operations and cash flows from the rest of the entity? 87 00:17:02.064 --> 00:17:16.815 The separate products, customers, sales staff, and cost records allow Sable to distinguish the line from the rest of the entity. The veterinary line is a component, so Sable continues to the disposal-status question. 88 00:17:16.815 --> 00:17:24.053 Has the component been disposed of, or does it qualify as held for sale? Sable has not completed the sale. 89 00:17:24.053 --> 00:17:39.009 The board-approved plan, immediate availability, active search for a buyer, active marketing at a price reasonable in relation to current fair value, expected sale within one year, and evidence that Sable is unlikely to 90 00:17:39.009 --> 00:17:43.584 change or withdraw the plan satisfy all six held-for-sale criteria. 91 00:17:43.584 --> 00:17:49.870 The veterinary line qualifies as held for sale, so Sable continues to the third condition. 92 00:17:49.870 --> 00:17:59.789 Does selling the veterinary line represent a strategic shift that has or will have a major effect on Sable's operations and financial results? 93 00:17:59.789 --> 00:18:08.170 The sale will remove Sable from the animal-health market while Sable continues its separate medical-instrument business. 94 00:18:08.170 --> 00:18:18.578 The veterinary line has separate products and customers, removes Sable from a market, and contributed 18 percent of the company's prior-year revenue. 95 00:18:18.578 --> 00:18:31.639 GAAP provides no 18 percent cutoff or safe harbor, so management considers those facts together. Management concludes that the disposal is a strategic shift that will have a major effect. 96 00:18:31.639 --> 00:18:41.627 The veterinary line first qualifies for discontinued-operations classification on September 30, 2026, when it meets the held-for-sale criteria. 97 00:18:41.627 --> 00:18:48.542 That classification date does not limit the income-statement amount to activity after September 30. 98 00:18:48.542 --> 00:18:59.368 Sable includes the veterinary line's operating result for the full 2026 reporting period, through December 31, because the line remains unsold at year-end. 99 00:18:59.368 --> 00:19:10.544 Classification changes where the component's result for the reporting period appears; it does not erase the component's activity before the classification date. 100 00:19:10.544 --> 00:19:22.488 Sable reaches the classification conclusion only after identifying a distinguishable component, qualifying held-for-sale status, and a strategic shift with a major effect. 101 00:19:22.488 --> 00:19:36.525 Step 2: Measure the discontinued operation. Build the pre-tax result. Before measuring a discontinued operation, determine that the component meets all three classification conditions. 102 00:19:36.525 --> 00:19:50.333 Then calculate its pre-tax discontinued-operation gain or loss from two amounts: the component's operating income or loss through the earlier of the sale date or the reporting date. 103 00:19:50.333 --> 00:20:04.752 the gain or loss from a completed disposal or from held-for-sale measurement. Both amounts describe the economic effect of owning and exiting the same component during the reporting period. 104 00:20:04.752 --> 00:20:12.076 Reporting only the disposal gain or loss would omit the component's final operating performance. 105 00:20:12.076 --> 00:20:21.612 Reporting only the operating result would omit the effect of selling the component or changing its recovery from use to sale. 106 00:20:21.612 --> 00:20:29.088 Which gain or loss enters the calculation depends on the component's status at the reporting date: 107 00:20:29.088 --> 00:20:40.922 Component's status, Disposed of during the period; Gain or loss included in discontinued operations, Include the gain or loss from the completed disposal. 108 00:20:40.922 --> 00:20:47.222 Use the provided amount unless the given information permits a direct calculation. 109 00:20:47.222 --> 00:21:03.513 Component's status, Held for sale at the reporting date; Gain or loss included in discontinued operations, Compare the long-lived asset's or disposal group's carrying amount with its fair value less cost to sell. 110 00:21:03.513 --> 00:21:14.040 Use the lower amount and recognize a loss when fair value less cost to sell is lower. Do not recognize an initial gain when it is higher. 111 00:21:14.040 --> 00:21:22.359 Measure a component held for sale. Use the lower of carrying amount or fair value less cost to sell. 112 00:21:22.359 --> 00:21:34.088 Measure a long-lived asset or disposal group classified as held for sale at the lower of its carrying amount or fair value less cost to sell. 113 00:21:34.088 --> 00:21:47.314 Recognize a loss when fair value less cost to sell is lower than carrying amount. Do not recognize an initial gain when fair value less cost to sell is higher. 114 00:21:47.314 --> 00:21:55.050 A S C Topic 360, Subtopic 10, Section 35, paragraphs 40 and 43 contain this measurement rule. 115 00:21:55.050 --> 00:22:11.105 Fair value less cost to sell may fall below carrying amount when demand for the assets weakens, the assets become obsolete or deteriorate, or the expected costs of completing the sale increase. 116 00:22:11.105 --> 00:22:23.417 The carrying amount reflects prior accounting for the assets; it does not guarantee that the company can recover that amount through a current sale. 117 00:22:23.417 --> 00:22:38.640 Held-for-sale classification changes how the company expects to recover the long-lived assets. Before classification, recovery comes principally from using the assets in the business. 118 00:22:38.640 --> 00:22:56.192 After classification, recovery comes principally from sale, so expected sale proceeds after selling costs become the relevant comparison with carrying amount. A shortfall is recognized when that amount is lower. 119 00:22:56.192 --> 00:23:04.344 An excess is not recognized as an initial gain because the company has not yet completed the sale. 120 00:23:04.344 --> 00:23:20.445 Stop depreciating assets classified as held for sale. Under A S C Topic 360, Subtopic 10, Section 35, paragraph 43, depreciation stops on long-lived assets while they are classified as held for sale. 121 00:23:20.445 --> 00:23:38.001 Depreciation allocates cost over periods of use; once recovery is principally through sale and the asset is measured under the sale model, continuing that use-based allocation would no longer describe how the carrying 122 00:23:38.001 --> 00:23:51.432 amount will be recovered. Unit 6 teaches the underlying asset-disposal and impairment models, including assets held and used, abandonment, and involuntary conversion. 123 00:23:51.432 --> 00:24:00.922 Measure the entire disposal group. A disposal group consists of assets, and sometimes related liabilities, that will be sold together. 124 00:24:00.922 --> 00:24:10.341 Before measuring the group under the held-for-sale model, apply the guidance that governs each asset or liability outside that model. 125 00:24:10.341 --> 00:24:18.414 Course problems will supply the resulting amounts when those separate calculations are outside the course's scope. 126 00:24:18.414 --> 00:24:33.640 Then compare the carrying amount of the entire group with the fair value less cost to sell of that same group. Do not compare the carrying amount of one asset with the fair value less cost to sell of a larger group. 127 00:24:33.640 --> 00:24:48.088 The problem will identify the assets and liabilities included in the comparison. This measurement order comes from A S C Topic 360, Subtopic 10, Section 35, paragraphs 39 and 43. Check your understanding. 128 00:24:48.088 --> 00:25:03.101 One qualifying component was sold during the year. Another qualifying component remains held for sale at year-end. Which gain or loss belongs with each component's operating result? Pause to consider your answer. 129 00:25:03.101 --> 00:25:10.325 Here is the explanation. For the sold component, include the gain or loss from the completed disposal. 130 00:25:10.325 --> 00:25:19.815 For the held-for-sale component, include any loss required by the lower-of-carrying-amount-or-fair-value-less-cost-to-sell comparison. 131 00:25:19.815 --> 00:25:27.888 Both results belong in discontinued operations because the components have already passed the classification test. 132 00:25:27.888 --> 00:25:44.623 Apply the measurement rule to Sable Ridge. The classification analysis established that Sable's veterinary-instrument line qualified as both held for sale and a discontinued operation on September 30, 2026. 133 00:25:44.623 --> 00:25:57.378 The line remained unsold at the December 31 reporting date. Now use these measurement facts: The line earned 120,000 dollars of operating income during 2026. 134 00:25:57.378 --> 00:26:13.707 The long-lived assets subject to held-for-sale measurement have an 800,000 dollars carrying amount before the held-for-sale adjustment. Those assets have a 480,000 dollars fair value less cost to sell. 135 00:26:13.707 --> 00:26:29.061 For this simplified example, the veterinary line has no other assets. Its 124,000 dollars of related liabilities retain the amounts determined under the GAAP that applies to each liability. 136 00:26:29.061 --> 00:26:38.729 Sable must first measure the held-for-sale assets and then combine any resulting loss with the line's operating income. 137 00:26:38.729 --> 00:26:55.464 First, compare the assets' 800,000 dollars carrying amount with their 480,000 dollars fair value less cost to sell. Fair value less cost to sell is lower, so Sable writes the assets down by 320,000 dollars: 138 00:26:55.464 --> 00:27:10.296 Carrying amount of 800,000 dollars, less fair value less cost to sell of 480,000 dollars, equals a held-for-sale loss of 320,000 dollars. 139 00:27:10.296 --> 00:27:19.273 Second, combine the 320,000 dollars held-for-sale loss with the line's 120,000 dollars of operating income. 140 00:27:19.273 --> 00:27:29.928 Because the line remained unsold at year-end, the operating income includes its results through the December 31 reporting date. 141 00:27:29.928 --> 00:27:44.064 Operating income of 120,000 dollars, less the held-for-sale loss of 320,000 dollars, equals a loss before income taxes of 200,000 dollars. 142 00:27:44.064 --> 00:27:56.967 Check your understanding. Before considering tax, what result belongs to the veterinary line? Pause to consider your answer. Here is the explanation. A 200,000 dollars loss. 143 00:27:56.967 --> 00:28:06.737 The line's 120,000 dollars operating income offsets part of the 320,000 dollars held-for-sale loss. Allocate the income tax effect. 144 00:28:06.737 --> 00:28:17.775 Intraperiod tax allocation presents income tax expense or benefit with the financial-statement components to which the tax effects are attributable. 145 00:28:17.775 --> 00:28:33.138 The tax effect attributable to continuing operations remains in continuing operations. The tax effect attributable to a discontinued operation is reported with that operation, which is presented net of tax. 146 00:28:33.138 --> 00:28:44.922 A S C Topic 740, Subtopic 20, Section 45, paragraph 2 requires this allocation between continuing operations and items reported outside continuing operations. 147 00:28:44.922 --> 00:28:55.811 Keeping the related tax effect with each statement category makes the after-tax sections comparable and allows them to add directly to net income. 148 00:28:55.811 --> 00:29:11.846 Income from continuing operations includes the tax consequences attributable to the business that remains. The discontinued-operation line includes the tax consequences attributable to the component that is leaving. 149 00:29:11.846 --> 00:29:27.732 Moving the component's result below continuing operations while leaving its related tax effect in the continuing tax line would misstate both after-tax sections even though total net income might still be correct. 150 00:29:27.732 --> 00:29:42.648 After calculating the pre-tax discontinued-operation gain or loss, apply the related income tax expense or benefit supplied in the problem. When the result is a gain, the tax expense reduces the gain: 151 00:29:42.648 --> 00:30:07.128 Calculation, Pre-tax gain; Amount, 200,000 dollars. Calculation, Less: related tax expense; Amount, negative 50,000 dollars. Calculation, Net-of-tax gain; Amount, 150,000 dollars. 152 00:30:07.128 --> 00:30:12.624 When the result is a loss, the tax benefit reduces the loss: 153 00:30:12.624 --> 00:30:33.696 Calculation, Pre-tax loss; Amount, negative 200,000 dollars. Calculation, Income tax benefit; Amount, 50,000. Calculation, Net-of-tax loss; Amount, negative 150,000 dollars. 154 00:30:33.696 --> 00:30:43.861 The second table describes the size of the loss: a 50,000 dollars tax benefit reduces a 200,000 dollars loss to 150,000 dollars. 155 00:30:43.861 --> 00:30:56.409 The pre-tax discontinued-operation gain or loss in these examples is a financial-reporting amount. It is not necessarily the component's taxable gain or loss. 156 00:30:56.409 --> 00:31:08.481 An asset's carrying amount can differ from its tax basis, so the financial-reporting gain or loss can differ from the amount reported on the tax return. 157 00:31:08.481 --> 00:31:21.982 Use the related income tax expense or benefit supplied in the problem; do not use the financial-reporting gain or loss to calculate taxable income or current tax payable. 158 00:31:21.982 --> 00:31:36.912 The veterinary line's 200,000 dollars pre-tax loss has a related 50,000 dollars income tax benefit. Sable therefore reports a 150,000 dollars loss from discontinued operations, net of tax. 159 00:31:36.912 --> 00:31:55.078 Sable Ridge veterinary instruments discontinued operation for the year ended December 31, 2026. Operating income of the line is 120,000 dollars. The held-for-sale loss is negative 320,000. 160 00:31:55.078 --> 00:32:10.056 Loss before income taxes is negative 200,000. The income tax benefit is 50,000. Loss from discontinued operations, net of tax, is negative 150,000 dollars. 161 00:32:10.056 --> 00:32:26.838 The 50,000 dollars benefit is the financial-statement tax effect attributable to the discontinued operation. It does not establish the veterinary line's taxable loss or its effect on Sable's tax return. 162 00:32:26.838 --> 00:32:43.953 Check your understanding. A discontinued component has a 60,000 dollars pre-tax gain and a 15,000 dollars related tax expense. What amount appears below continuing operations? Pause to consider your answer. 163 00:32:43.953 --> 00:32:51.264 Here is the explanation. A 45,000 dollars gain from discontinued operations, net of tax. 164 00:32:51.264 --> 00:33:08.278 Step 3: Present the discontinued operation. Present the current-period result after continuing operations. An entity presents the discontinued operation after income from continuing operations on the income statement. 165 00:33:08.278 --> 00:33:23.802 Both amounts are after tax, so they combine to net income on the same basis. A S C Topic 205, Subtopic 20, Section 45, paragraphs 3 through 3B contain the income-statement presentation requirements. 166 00:33:23.802 --> 00:33:37.914 Two requirements determine the presentation: Location: Exclude the discontinued component's operating results and disposal or held-for-sale gain or loss from continuing operations. 167 00:33:37.914 --> 00:33:51.949 Present those amounts in discontinued operations below income from continuing operations. Tax presentation: Report the discontinued operation net of its related income tax effect. 168 00:33:51.949 --> 00:34:03.944 Income from continuing operations and the discontinued-operation amount are therefore both after-tax amounts. Apply the presentation rule to Sable Ridge. 169 00:34:03.944 --> 00:34:15.313 Sable combines the veterinary line's 120,000 dollars operating income and 320,000 dollars held-for-sale loss into a 200,000 dollars pre-tax loss. 170 00:34:15.313 --> 00:34:29.112 After its related 50,000 dollars tax benefit, Sable presents a 150,000 dollars loss from discontinued operations below its 750,000 dollars of income from continuing operations: 171 00:34:29.112 --> 00:34:50.355 Sable Ridge income statement excerpt for the year ended December 31, 2026. Income from continuing operations is 750,000 dollars. The discontinued-operation loss, net of tax, is negative 150,000. 172 00:34:50.355 --> 00:34:53.640 Net income is 600,000 dollars. 173 00:34:53.640 --> 00:34:56.345 Recast comparative income statements. 174 00:34:56.345 --> 00:35:11.554 Under A S C Topic 205, Subtopic 20, Section 45, paragraph 3, when a component qualifies as a discontinued operation, the entity presents that component in discontinued operations for every prior period shown. 175 00:35:11.554 --> 00:35:26.470 The entity moves the component's results out of prior-period continuing operations. It does not change prior-period net income. Recasting gives every column the same definition of the continuing business. 176 00:35:26.470 --> 00:35:39.120 Without it, a reader would compare current-year continuing operations after the veterinary line's removal with a prior-year subtotal that still included the veterinary line. 177 00:35:39.120 --> 00:35:49.283 The apparent change could reflect the inconsistent boundary rather than a change in the performance of Sable's medical-instrument business. 178 00:35:49.283 --> 00:35:59.812 In 2025, Sable originally included the veterinary line's 180,000 dollars pre-tax income and 45,000 dollars tax expense in continuing operations. 179 00:35:59.812 --> 00:36:12.096 Sable now presents the 135,000 dollars net amount below continuing operations in the comparative statement. Compare the two presentations below to see what Sable moves: 180 00:36:12.096 --> 00:36:33.485 Sable Ridge 2025 income-statement presentation, as originally reported and as recast in the 2026 comparative statements. Income before income taxes is 780,000 dollars as originally reported and 600,000 as recast. 181 00:36:33.485 --> 00:36:54.571 Income tax expense in continuing operations is negative 195,000 as originally reported and negative 150,000 as recast. Income from continuing operations is 585,000 as originally reported and 450,000 as recast. 182 00:36:54.571 --> 00:37:10.512 Income from discontinued operations, net of tax, has no amount in the original column and is 135,000 as recast. Net income is 585,000 dollars in both columns. 183 00:37:10.512 --> 00:37:24.910 In the recast column, Sable removes the veterinary line's 180,000 dollars pre-tax income and 45,000 dollars related tax expense from continuing operations. 184 00:37:24.910 --> 00:37:39.957 Sable moves the 135,000 dollars net amount below continuing operations. Net income remains 585,000 dollars. The complete recast 2025 statement appears as follows. 185 00:37:39.957 --> 00:37:52.776 Sable reports only its continuing medical-instrument business in the revenue, expense, gain, and loss lines above discontinued operations. 186 00:37:52.776 --> 00:38:03.594 Sable Ridge Instruments income statement for the year ended December 31, 2025, as recast, in United States dollars. 187 00:38:03.594 --> 00:38:20.619 Instrument sales are 3,900,000 dollars, consumables sales are 1,650,000 dollars, and installation and calibration revenue is 850,000 dollars, for total revenue of 6,400,000 dollars. 188 00:38:20.619 --> 00:38:28.897 Cost of revenue is negative 3,520,000 dollars, giving gross profit of 2,880,000 dollars. 189 00:38:28.897 --> 00:38:48.463 Selling and marketing is negative 900,000 dollars, research and development is negative 580,000 dollars, and general and administrative is negative 700,000 dollars, giving operating income of 700,000 dollars. 190 00:38:48.463 --> 00:39:01.914 Interest and dividend income is 55,000 dollars and interest expense is negative 155,000 dollars. Income before income taxes is 600,000 dollars. 191 00:39:01.914 --> 00:39:21.480 Income tax expense is negative 150,000 dollars, giving income from continuing operations of 450,000 dollars. Income from discontinued operations, net of tax, is 135,000 dollars. Net income is 585,000 dollars. 192 00:39:21.480 --> 00:39:39.905 Check your understanding. Does presenting the veterinary line as a discontinued operation in the 2025 comparative column correct an error in the 2025 net income? Pause to consider your answer. Here is the explanation. 193 00:39:39.905 --> 00:39:55.104 No. Sable changes where it presents the veterinary line in the current comparative statement. Sable does not change the 585,000 dollars of net income previously reported for 2025. 194 00:39:55.104 --> 00:40:04.719 Present held-for-sale balances separately. An entity reports the result of a discontinued operation net of tax on the income statement. 195 00:40:04.719 --> 00:40:17.469 When that discontinued operation is still held for sale at the reporting date, the entity reports the disposal group's assets separately from its liabilities on the balance sheet. 196 00:40:17.469 --> 00:40:32.782 It does not subtract the liabilities from the assets and report only one net amount. A S C Topic 205, Subtopic 20, Section 45, paragraphs 10 and 11 contain the balance-sheet presentation and disclosure requirements. 197 00:40:32.782 --> 00:40:43.964 The two sides provide different information. Assets are resources the entity expects to sell; liabilities are obligations associated with the disposal group. 198 00:40:43.964 --> 00:40:52.583 A single net amount would hide the scale of both the resources leaving the business and the obligations attached to them. 199 00:40:52.583 --> 00:41:05.118 Measuring a disposal group together does not create a right to offset its assets and liabilities on the balance sheet. Apply the balance-sheet presentation rule to Sable Ridge. 200 00:41:05.118 --> 00:41:12.098 The veterinary line's only assets are the long-lived assets measured at 480,000 dollars in Step 2. 201 00:41:12.098 --> 00:41:22.569 Sable separately reports the line's 124,000 dollars of related liabilities at the amounts determined under the GAAP that applies to each liability. 202 00:41:22.569 --> 00:41:27.768 At December 31, 2026, Sable reports both lines in the full balance sheet: 203 00:41:27.768 --> 00:41:48.885 Sable Ridge Instruments balance sheet at December 31, 2026, in United States dollars. Current assets. Cash and cash equivalents, 823,000 dollars. Accounts receivable, net, 1,186,000 dollars. 204 00:41:48.885 --> 00:42:13.337 Inventories, 1,240,000 dollars. Prepaid expenses, 130,000 dollars. Assets held for sale, 480,000 dollars. Total current assets, 3,859,000 dollars. Noncurrent assets. Available-for-sale debt securities, 1,275,000 dollars. 205 00:42:13.337 --> 00:42:33.788 Property, plant and equipment, net, 2,180,000 dollars. Intangible assets, net, 340,000 dollars. Total assets, 7,654,000 dollars. Current liabilities. Accounts payable, 890,000 dollars. 206 00:42:33.788 --> 00:42:58.017 Accrued liabilities, 415,000 dollars. Contract liability, 15,000 dollars. Current maturities of long-term debt, 300,000 dollars. Liabilities held for sale, 124,000 dollars. Total current liabilities, 1,744,000 dollars. 207 00:42:58.017 --> 00:43:22.024 Noncurrent liabilities. Long-term debt, less current maturities, 1,700,000 dollars. Deferred income taxes, 285,000 dollars. Total liabilities, 3,729,000 dollars. Shareholders' equity. Common stock, 1,000,000 dollars. 208 00:43:22.024 --> 00:43:44.587 Retained earnings, 2,850,000 dollars. Accumulated other comprehensive income, 75,000 dollars. Total shareholders' equity, 3,925,000 dollars. Total liabilities and shareholders' equity, 7,654,000 dollars. 209 00:43:44.587 --> 00:43:53.256 Assets held for sale and liabilities held for sale are the two separate lines. 210 00:43:53.256 --> 00:44:09.859 Sable does not report one 356,000 dollars net amount. Sable uses separate lines for the 480,000 dollars of resources leaving the business and the 124,000 dollars of obligations attached to them. 211 00:44:09.859 --> 00:44:17.218 Reporting only 356,000 dollars would prevent a reader from seeing either gross amount. 212 00:44:17.218 --> 00:44:35.704 When Sable presents its 2025 and 2026 balance sheets side by side, it uses separate lines for the veterinary line's assets and liabilities in both columns. The change to the 2025 column is a presentation change only. 213 00:44:35.704 --> 00:44:52.392 The 2025 amounts remain the amounts recognized under GAAP as of December 31, 2025. Sable does not apply the 2026 held-for-sale measurement or the 320,000 dollars write-down retroactively to 2025. 214 00:44:52.392 --> 00:45:06.240 Review the discontinued-operation note. Start with the income statement and balance sheet. Identify which discontinued-operation totals and major classes already appear there. 215 00:45:06.240 --> 00:45:17.555 Then use the note to locate the required information that is not presented on the statements. GAAP does not prescribe the five questions below. 216 00:45:17.555 --> 00:45:29.187 They are a reading framework for organizing the disclosure requirements, including requirements that apply only when the related facts are present. 217 00:45:29.187 --> 00:45:38.208 The note requirements come from A S C Topic 205, Subtopic 20, Section 50, paragraphs 1, 4A, 4B, and 5B through 5D. 218 00:45:38.208 --> 00:45:52.584 Student reading question, What happened?; Required or conditional information to locate, The facts and circumstances that led to the disposal and, for an incomplete disposal, its expected manner and timing. 219 00:45:52.584 --> 00:46:07.937 Student reading question, How did it affect income?; Required or conditional information to locate, Locate the disposal or held-for-sale gain or loss and the major classes of income and expense that are not already shown 220 00:46:07.937 --> 00:46:14.707 on the income statement. Trace the pre-tax amounts to the after-tax discontinued-operation total. 221 00:46:14.707 --> 00:46:29.851 Student reading question, What assets and liabilities are leaving?; Required or conditional information to locate, Locate the major asset and liability classes that are not already shown on the balance sheet and trace 222 00:46:29.851 --> 00:46:32.782 them to the separate balance-sheet totals. 223 00:46:32.782 --> 00:46:47.856 Student reading question, What cash-flow information did the entity provide?; Required or conditional information to locate, Determine whether the entity disclosed total operating and investing cash flows or used the 224 00:46:47.856 --> 00:46:55.044 permitted alternative: depreciation, amortization, capital expenditures, and significant noncash items. 225 00:46:55.044 --> 00:47:10.188 Student reading question, Does the entity retain significant involvement?; Required or conditional information to locate, If so, locate the nature and expected duration of that involvement and the related cash inflows 226 00:47:10.188 --> 00:47:21.912 and outflows. Also look for revenue or expense that now appears in continuing operations if transactions between the two businesses were eliminated before the disposal. 227 00:47:21.912 --> 00:47:36.657 Compare two EDGAR filings. Real companies use different labels and supply different levels of detail, but the relationship between the statements and notes remains the same. 228 00:47:36.657 --> 00:47:41.344 Start with the net-of-tax line on the income statement. 229 00:47:41.344 --> 00:47:56.856 Then use the discontinued-operations note to identify the business, the pre-tax components, the income tax effect, and any assets, liabilities, cash flows, or continuing involvement. 230 00:47:56.856 --> 00:48:12.695 3M Company. 3M completed the spin-off of its Health Care business, Solventum, on April 1, 2024. Its 2024 income statement reports the discontinued operation in one line below continuing operations. 231 00:48:12.695 --> 00:48:30.143 The written chapter shows the statement and note excerpts. The 2024, 2023, and 2022 columns do not measure equal periods of Solventum's activity. The 2023 and 2022 amounts include twelve months of Health Care results. 232 00:48:30.143 --> 00:48:46.224 The 2024 amount includes only January through March because Solventum became a separate company on April 1. A smaller 2024 amount therefore does not, by itself, show that the business performed worse. 233 00:48:46.224 --> 00:49:01.339 It primarily reflects that 3M reported only three months of the business in discontinued operations. The Note 2 excerpt shows how the 164 million dollars on the income statement was built. 234 00:49:01.339 --> 00:49:10.666 For the three months before the separation, the Health Care business earned 262 million dollars before income taxes. 235 00:49:10.666 --> 00:49:26.184 After 98 million dollars of income tax expense, the amount reported in discontinued operations was 164 million dollars. The complete source is available in 3M Company's 2024 Form 10-K on EDGAR. 236 00:49:26.184 --> 00:49:38.676 The O D P Corporation sold its Varis Division in October 2024. Its statement uses a shorter label than 3M's statement, but it places the amount in the same location. 237 00:49:38.676 --> 00:49:51.244 The written chapter shows the statement and note excerpts. The Note 16 excerpt starts with a 38 million dollars operating loss and a 92 million dollars disposal loss. 238 00:49:51.244 --> 00:50:04.569 The disposal loss includes a 90 million dollars noncash loss on the Varis sale and a 2 million dollars loss related to guarantees for the previously disposed European Business. 239 00:50:04.569 --> 00:50:16.834 The operating and disposal losses produce a 130 million dollars pre-tax loss. A 21 million dollars income tax benefit reduces the net loss to 109 million dollars. 240 00:50:16.834 --> 00:50:29.175 The same note lists the Varis disposal group's 74 million dollars of held-for-sale assets and 12 million dollars of held-for-sale liabilities at December 30, 2023. 241 00:50:29.175 --> 00:50:41.289 O D P is required to present the disposal group's assets separately from its liabilities; it cannot replace those amounts with a 62 million dollars net balance. 242 00:50:41.289 --> 00:50:51.510 O D P removed the Varis assets and liabilities from held-for-sale classification when it sold and deconsolidated Varis in October 2024. 243 00:50:51.510 --> 00:51:04.381 A reader therefore should not expect those held-for-sale balances at the end of 2024. The complete source is available in The O D P Corporation's 2024 Form 10-K on EDGAR. 244 00:51:04.381 --> 00:51:20.280 The labels vary, and the notes do not follow one visual template. In both filings, however, the income statement supplies the net-of-tax result and the note supplies the detail needed to understand that result. 245 00:51:20.280 --> 00:51:36.849 Check your understanding. Compare the excerpts. What net-of-tax label does each company use on its income statement? Name one item for each company that you learn only by reading the note excerpt or its context. 246 00:51:36.849 --> 00:51:50.434 Pause to consider your answer. Here is the explanation. 3M uses Net income (loss) from discontinued operations, net of taxes. O D P uses Discontinued operations, net of tax. 247 00:51:50.434 --> 00:51:57.658 3M's note supplies the pre-tax income and tax expense used to produce the net-of-tax amount. 248 00:51:57.658 --> 00:52:13.520 O D P's note supplies the operating and disposal losses, tax benefit, and the separate held-for-sale asset and liability totals. The displayed excerpts do not provide continuing-involvement information. 249 00:52:13.520 --> 00:52:20.352 The statements report the net-of-tax results, but they do not supply the other details. 250 00:52:20.352 --> 00:52:29.432 Distinguish unusual or infrequent items. A material transaction or event may be unusual, infrequent, or both. 251 00:52:29.432 --> 00:52:39.178 Those descriptions do not, by themselves, determine where the resulting gain or loss appears on the income statement. 252 00:52:39.178 --> 00:52:55.504 Unless another accounting rule requires different treatment, report the item within continuing operations and provide enough information for a reader to understand its nature and financial effect. 253 00:52:55.504 --> 00:53:07.416 Evaluate the event in the company's context. Unusual nature and infrequency are separate judgments. An event may satisfy one, both, or neither. 254 00:53:07.416 --> 00:53:24.796 Judgment, Unusual in nature; Question, Is the event highly abnormal and unrelated, or only incidentally related, to the company's ordinary activities?; Evidence to consider, What the company normally does, where it 255 00:53:24.796 --> 00:53:30.237 operates, and the business environment in which the event occurred. 256 00:53:30.237 --> 00:53:47.617 Judgment, Infrequent in occurrence; Question, Is this type of event not reasonably expected to recur in the foreseeable future?; Evidence to consider, The company's history, events affecting similar operations, and 257 00:53:47.617 --> 00:53:51.840 conditions that make recurrence more or less likely. 258 00:53:51.840 --> 00:54:05.240 The conclusion is company-specific. Storm damage might be neither unusual nor infrequent for a company with facilities in a storm-prone area and a history of similar losses. 259 00:54:05.240 --> 00:54:13.837 The same type of damage might satisfy one or both judgments for a company operating in a different environment. 260 00:54:13.837 --> 00:54:27.005 Size alone does not make an event unusual or infrequent, and management should not use the labels without evidence about the company's activities and expected recurrence. 261 00:54:27.005 --> 00:54:37.384 These definitions and the emphasis on the entity's environment come from A S C Topic 220, Subtopic 20, Section 55, paragraphs 1 and 2. 262 00:54:37.384 --> 00:54:52.488 A S C Topic 220, Subtopic 20, Section 55, paragraph 3 illustrates the point with rare storm damage to a tobacco manufacturer's crops, a land sale, and an earthquake that destroys an oil refinery. 263 00:54:52.488 --> 00:55:02.603 Present the item within continuing operations. The company first measures the transaction under the accounting guidance that applies to it. 264 00:55:02.603 --> 00:55:16.648 Calling an event unusual or infrequent does not change the amount of the gain or loss. The company then applies these presentation rules: Keep the item within income from continuing operations. 265 00:55:16.648 --> 00:55:22.979 The continuing business still includes the activities and risks that produced the item. 266 00:55:22.979 --> 00:55:33.676 If the item is material, present its nature and financial effect separately within continuing operations or disclose that information in the notes. 267 00:55:33.676 --> 00:55:47.721 Present the item as a pre-tax amount on the face of the income statement. Include its tax effect in the tax expense or benefit for continuing operations rather than showing the item net of tax. 268 00:55:47.721 --> 00:55:54.634 A S C Topic 220, Subtopic 20, Section 45, paragraph 1 contains these presentation requirements. 269 00:55:54.634 --> 00:56:04.022 This presentation keeps the reported result of the continuing business complete while preserving visibility for a material event. 270 00:56:04.022 --> 00:56:20.031 An event does not cease to affect the continuing business merely because it is rare or abnormal. Separate presentation or note disclosure allows a reader to see that effect without removing it from continuing operations. 271 00:56:20.031 --> 00:56:34.949 The unusual-or-infrequent judgment also does not decide whether the item is an operating or nonoperating item. That placement depends on the nature of the transaction and the company's presentation policy. 272 00:56:34.949 --> 00:56:45.792 The special point here is visibility: a material item should not disappear inside a broad caption merely because it remains in continuing operations. 273 00:56:45.792 --> 00:57:02.802 Compare the presentation in two S E C filings. A S C Topic 220, Subtopic 20, Section 45, paragraph 1 requires an entity to make the nature and financial effect of a material event visible. 274 00:57:02.802 --> 00:57:17.640 The entity may present that information separately within continuing operations or disclose it in the notes. Linde and Turning Point Brands show the two approaches. 275 00:57:17.640 --> 00:57:30.179 Linde P L C: a separate statement line for conflict-related charges. Linde reports Russia-Ukraine conflict and other charges as a separate line in its statement of income. 276 00:57:30.179 --> 00:57:43.745 Note 3 explains why the 2022 amount warrants that visibility: after Russia invaded Ukraine and sanctions followed, Linde concluded that it no longer controlled its Russian subsidiaries. 277 00:57:43.745 --> 00:57:52.911 The resulting deconsolidation, write-offs, and related conflict charges contributed to a 1.029 billion dollars pre-tax total. 278 00:57:52.911 --> 00:58:03.837 The event is unusual because a geopolitical conflict and the resulting loss of control are not ordinary, recurring costs of selling industrial gases. 279 00:58:03.837 --> 00:58:16.522 Yet the charge still arose while Linde's continuing business was operating. Linde therefore includes the separate line among the expenses used to calculate operating profit. 280 00:58:16.522 --> 00:58:30.528 The note provides the explanation and after-tax context that the short statement caption cannot provide by itself. The written chapter links to Linde P L C's complete 2022 Form 10-K on EDGAR. 281 00:58:30.528 --> 00:58:44.045 Turning Point Brands, Inc.: a broad statement caption plus note detail. A December 2023 tornado damaged leaf tobacco stored for Turning Point Brands in a third-party Tennessee warehouse. 282 00:58:44.045 --> 00:58:52.039 Turning Point recorded a 15.2 million dollars inventory reserve and a 15.2 million dollars insurance recovery. 283 00:58:52.039 --> 00:59:04.611 Both amounts appear within Other operating income, net, so they offset each other within that broad income-statement caption. The income statement does not name the tornado. 284 00:59:04.611 --> 00:59:11.660 Note 6 identifies the event, reports both amounts, and identifies the caption that contains them. 285 00:59:11.660 --> 00:59:24.596 In later correspondence with the S E C, Turning Point stated that the inventory damage was both unusual in nature and infrequent in occurrence under A S C Topic 220, Subtopic 20. 286 00:59:24.596 --> 00:59:37.677 The company cited that conclusion when explaining why it used Other operating income, net rather than Cost of sales. The comparison shows the two permitted presentation approaches. 287 00:59:37.677 --> 00:59:53.229 Linde names the event in a separate income-statement line and adds detail in a note. Turning Point uses a broader income-statement caption and relies on the note to make the event and its financial effects visible. 288 00:59:53.229 --> 01:00:06.528 The written chapter links to Turning Point Brands' complete 2023 Form 10-K on EDGAR and to Turning Point's response to the S E C about the A S C Topic 220, Subtopic 20 classification. 289 01:00:06.528 --> 01:00:19.171 Apply the rule to Sable Ridge. In September 2026, a contract manufacturer to which Sable had advanced 95,000 dollars entered liquidation. Sable will not recover the advance. 290 01:00:19.171 --> 01:00:30.499 The event does not involve the disposal of a Sable component or a strategic shift in Sable's business. The loss therefore remains in continuing operations. 291 01:00:30.499 --> 01:00:40.364 Under Sable's presentation policy, supplier-advance losses are operating expenses, so Sable places this loss within operating expenses. 292 01:00:40.364 --> 01:00:52.934 Because the loss is material, Sable either presents it separately within continuing operations, as Chapter 6 did, or discloses its nature and financial effect in the notes. 293 01:00:52.934 --> 01:01:04.335 On the face of the income statement, Sable reports the 95,000 dollars loss as a pre-tax amount rather than subtracting a related tax benefit from that line. 294 01:01:04.335 --> 01:01:15.809 These facts establish the amount and placement of the supplier loss, but they do not establish whether supplier failures are unusual or infrequent for Sable. 295 01:01:15.809 --> 01:01:30.498 That conclusion would require evidence about Sable's supplier history, ordinary operating risks, and expected recurrence. The loss remains in continuing operations either way. Check your understanding. 296 01:01:30.498 --> 01:01:38.172 Deliberate product tampering forces Sable to recall and destroy one production run. The loss is material. 297 01:01:38.172 --> 01:01:53.665 Sable has never experienced product tampering, the event is highly abnormal for its operations, and a similar event is not reasonably expected to recur. Sable continues producing and selling the affected product. 298 01:01:53.665 --> 01:02:06.600 Is the loss unusual, infrequent, or both? Where and how does Sable present it? Pause to consider your answer. Here is the explanation. The supplied facts support both judgments. 299 01:02:06.600 --> 01:02:19.330 The tampering is unusual in nature because it is highly abnormal in Sable's operations. It is infrequent because a similar event is not reasonably expected to recur. 300 01:02:19.330 --> 01:02:28.898 Neither conclusion makes it a discontinued operation: Sable did not dispose of a component or classify one as held for sale. 301 01:02:28.898 --> 01:02:42.168 Sable reports the loss in continuing operations, presents its nature and financial effect separately on the statement or in the notes, and shows any face amount before tax. 302 01:02:42.168 --> 01:02:51.841 Practice: Apply the steps to a service company. Meridian Home Services repairs household appliances through four regional service centers. 303 01:02:51.841 --> 01:03:02.356 It also operated a home-warranty administration division with its own subscribers, claims staff, manager, contracts, and monthly financial statements. 304 01:03:02.356 --> 01:03:13.782 During 2026, Meridian completed two transactions: It sold its Lakeshore repair center. The center had dedicated technicians, service vehicles, and local customers. 305 01:03:13.782 --> 01:03:25.558 Its monthly schedules identified the center's revenue, expenses, customer collections, and operating payments and reconciled those amounts to Meridian's general ledger. 306 01:03:25.558 --> 01:03:35.793 Meridian continues to provide the same appliance-repair services through its other three centers. The sale produced a 24,000 dollars pre-tax loss. 307 01:03:35.793 --> 01:03:47.219 It sold the home-warranty administration division and left the subscription warranty market. Warranty administration was one of Meridian's two operating divisions. 308 01:03:47.219 --> 01:03:59.836 It served different customers under separate contracts, and management reviewed its results separately each month. After the sale, Meridian provides only appliance-repair services. 309 01:03:59.836 --> 01:04:15.187 Meridian will process open claims for the buyer for three months at market rates. The buyer depends on Meridian's claims system during that period, and Meridian expects the arrangement to produce significant cash flows. 310 01:04:15.187 --> 01:04:27.314 During 2026, the division earned 72,000 dollars before tax and Meridian recognized a 132,000 dollars loss on the sale. The division earned 80,000 dollars before tax in 2025. 311 01:04:27.314 --> 01:04:42.315 The 60,000 dollars combined pre-tax loss from the home-warranty division's 2026 operating income and sale loss has a related 15,000 dollars tax benefit. The related tax expense on its 2025 income is 20,000 dollars. 312 01:04:42.315 --> 01:04:48.624 Complete each decision and calculation below. The page gives feedback after each response. 313 01:04:48.624 --> 01:05:08.514 Sources. A S C Topic 205, Subtopic 20, Section 45, paragraphs 1B and 1C, the strategic-shift and major-effect criterion. A S C Topic 205, Subtopic 20, Section 45, paragraph 3, income-statement presentation. 314 01:05:08.514 --> 01:05:18.459 A S C Topic 205, Subtopic 20, Section 45, paragraphs 10 and 11, comparative balance-sheet presentation. 315 01:05:18.459 --> 01:05:30.046 A S C Topic 205, Subtopic 20, Section 50, paragraphs 1, 4A, 4B, and 5B through 5D, note disclosures and reconciliations. 316 01:05:30.046 --> 01:05:40.764 A S C Topic 220, Subtopic 20, Section 45, paragraph 1, presentation of unusual or infrequently occurring items. 317 01:05:40.764 --> 01:06:01.426 A S C Topic 205, Subtopic 20, Section 45, paragraph 1E, held-for-sale criteria for a component or group of components. A S C Topic 360, Subtopic 10, Section 35, paragraphs 39, 40, and 43, held-for-sale measurement. 318 01:06:01.426 --> 01:06:22.475 A S C Topic 740, Subtopic 20, Section 45, paragraph 2, intraperiod tax allocation. F A S B Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. 319 01:06:22.475 --> 01:06:29.234 Return to the written chapter for the Meridian Home Services practice. 320 01:06:29.234 --> 01:06:49.510 Decide whether the Lakeshore center sale and the home-warranty division sale qualify as discontinued operations, calculate the net-of-tax amounts for 2026 and 2025, and decide how Meridian presents each result. 321 01:06:49.510 --> 01:06:53.952 Attempt each step before reading the feedback.