The Financial Accounting Standards Board (FASB) drafts and maintains the generally accepted accounting procedures (GAAP), which are the accounting rules by which public and private companies must abide. Statement of Financial Accounting Standards Number 144 defines how U.S. businesses should report the sale of business segments. The sale of a business segment presumes that the operations associated with that segment will terminate for the disposing business. This is an important distinction when determining how to report the sale.
Calculate your basis, or value, of the goods being sold. If the assets were held for sale prior to the disposition, the basis to the original owner before the sale will equal the lower of the value of the assets as stated on the previous owner’s books or the current fair market value of the assets minus the cost of the sale. Costs of the sale include commissions and legal fees. If you list the basis based on the second option, you will recognize an immediate loss. This “adjustment loss” will be reported separately from any gain from the disposal.
Calculate the gain from the sale of the segment. Gain is calculated by subtracting what you received for the asset minus the business’s basis, or investment, in the asset.
Report the income and expenses generated by the sold business segment during the year it is sold separately from income from continuing operations on the income statement. Generally prior to a sale, a business segment will generate income and expenses for its parent company. If expenses exceed income, you will have a loss on discontinued operations; if income exceeds expenses you will have a gain. If you incurred an adjustment loss, subtract that from any ordinary gains or losses reported in relation to the operations of the discontinued business segment. Report this amount immediately after you report the total income or loss from continuing operations on the income statement.
List the gain from the disposal of the business segment separately on the financial statement. The label identifying the gain must clearly identify the proceeds as derived from the sale of the segment. List the gain separately from the income from continuing and discontinued operations on the income statement.
Prepare the footnote regarding the sale of the asset. The footnote must provide a description of the facts and circumstances leading to the disposal, a description of any loss caused by preparing the segment’s assets for fail, and the amounts of any revenue, pretax profit or loss generated by the discontinued operations.
When preparing financial statements, consult with a certified public accountant. This article is not intended to be legal or financial advice.
- When preparing financial statements, consult with a certified public accountant. This article is not intended to be legal or financial advice.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.