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Impairment Loss and Discontinued Operations: Accounting and Disclosure


When a business decides to shut down or sell a major component of its operations, the financial reporting implications extend far beyond a simple reclassification.


Accounting for discontinued operations requires evaluating impairment loss, remeasuring assets, and separating financial results in accordance with strict standards.


This article explains how to recognize and measure impairment losses in discontinued operations, how these are reflected in financial statements, and why accurate classification is critical for investors and management.



What Are Discontinued Operations?

Under IFRS 5 and ASC 205-20 (U.S. GAAP), a discontinued operation refers to a component of a business that has been disposed of or is classified as held for sale, and:

  • Represents a separate major line of business or geographical area, or

  • Is part of a coordinated plan to dispose of such a segment


The key requirement is that the component must be strategically significant and separable operationally and financially.



What Is an Impairment Loss?

An impairment loss occurs when the carrying amount of an asset (or asset group) exceeds its recoverable amount.


For discontinued operations, this usually arises when the fair value less costs to sell is lower than the book value.


This loss must be recognized immediately to ensure that the balance sheet reflects the recoverable value of the assets being sold or discontinued.



Accounting Flow: Discontinued Operations and Impairment

When a business classifies a component as a discontinued operation, the accounting involves two main stages:


Stage 1: Classification as Held for Sale

The component is classified as held for sale if:

  • Management is committed to the plan

  • The sale is probable and expected within 12 months

  • The component is available for immediate sale

  • An active program to locate a buyer has begun


Once classified:

  • Assets and liabilities of the discontinued component are separately presented

  • Depreciation stops

  • The component is measured at the lower of:

    • Carrying amount

    • Fair value less cost to sell


If the fair value is lower, an impairment loss is recognized immediately.


Stage 2: Measurement and Impairment

At the time of classification:

Impairment Loss = Carrying Amount – Fair Value (less cost to sell)


The impairment loss is recognized in discontinued operations on the income statement, not in continuing operations.


If the fair value later increases, a gain can be recognized, but only up to the amount of previous impairments.



Example: Impairment Loss on a Discontinued Division

A company decides to sell its European manufacturing division, which qualifies as a discontinued operation.

  • Carrying value of assets: 50 million

  • Estimated fair value less cost to sell: 42 million


Calculation

Impairment Loss = 50 million – 42 million = 8 million


Journal Entry

  • Dr Impairment Loss on Discontinued Operations 8,000,000

  • Cr Assets Held for Sale 8,000,000

This entry reduces the carrying amount of the discontinued assets to 42 million.



Presentation in Financial Statements


Balance Sheet

  • Assets and liabilities of discontinued operations are grouped separately under:

    • Assets held for sale

    • Liabilities associated with assets held for sale


They are not combined with the rest of the assets and liabilities.


Income Statement

A single amount is reported in the income statement under discontinued operations, composed of:

  1. Net income or loss from the discontinued component

  2. Impairment loss (or gain on disposal)

The presentation is typically as follows:

Profit (loss) from discontinued operations, net of tax– includes operating results + impairment loss

This allows users to clearly distinguish between ongoing and discontinued business performance.



Subsequent Adjustments

If the fair value of the discontinued operation changes before the sale:

  • Additional impairment losses must be recognized if value drops

  • Reversal of impairment is allowed (IFRS) but not allowed under U.S. GAAP, and only up to the amount previously impaired


This ensures conservative reporting and avoids overstating recoverable values.



Why This Matters for Analysts and Management

Understanding impairment in discontinued operations is essential because:

  • It affects profitability, especially in years with restructuring or divestitures

  • Misclassification can distort earnings quality

  • Impairment losses impact book value and equity metrics

  • Presentation matters: clean separation of discontinued ops improves comparability and transparency



Common Pitfalls

  • Delaying classification of held-for-sale status

  • Failing to reassess fair value periodically

  • Incorrectly including impairment loss in continuing operations

  • Continuing depreciation after classification as held for sale

These errors can result in material misstatements and audit findings.


___________________

When a business component is discontinued, impairment loss recognition becomes a central part of the accounting process.

The company must:

  • Measure assets at fair value less cost to sell

  • Recognize impairment loss if fair value drops below carrying amount

  • Stop depreciation

  • Disclose the impact in the discontinued operations section of the financial statements


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