Discontinued operations and depreciation amortization treatment

Accounting

Discontinued Operations, Depreciation and Amortization

Discontinued Operations, Depreciation and Amortization Policy Memo

This memo aims to address the recent business dealings between Winning Big (WC) and Bugsy Siegel from an accounting standpoint. The project entailed researching accounting issues from the FASB, AICPA and the SEC as well as any available pronouncements, bulletins, interpretations, or concept statements that pertained to the business arrangement. The memo was based on the assumption that the scenario was to be researched thoroughly and reported back to management. The memo will first attempt to decipher any issues and concerns, site applicable professional pronouncements pertaining to those issues and to discuss viable accounting alternatives available. The questions being asked are if WB should record the disposal of PC and T. As a discontinued Operation and if they should halt depreciation and amortization of its assets that were involved in the transactions. Of the possibilities, a choice of which choice would be the correct option for these scenarios and why is therefore addressed.

The scenario facts were that Bugsy Siegal owned 10m shares of a publicly traded organization called Winning Big. The parties came to a two part buy back agreement of those 10m shares which included:

35 per share * 8m shares = $280m financed with bank debt and publicly bonds

35 per share * 2m shares = $70m but in exchange represents a 100% stock for Paradise City (PC) and 25% interest in Trifecta (T).

PC's book value (with allocated goodwill is $30m and an inter-company payable of $3m) is $45m / the 25% in T. represents a value of $4m.

After fees and book values of PC and T, WB has a pre-tax book gain of $20m.

The problem is that WB will need to establish certain requirements in regard to the accounting and reporting as well as to establish the true gain or loss from the disposal. WB will have to create the separate line of business and operations must be identified. The physical assets and results of the operations for PC and T. will need to be segregated for any internal financial reporting purposes. For the reporting requirements, WB will need to show a separate item on their income statement after the income tax expense is reported and also they will need to show a net tax. Another reporting requirement will need to be broken out as income / loss from operations prior to the official transfer date the company adopts a plan to dispose of PC and T. The other reporting requirement would be to clearly define the gain/loss of the disposal.

Possible issues relate to the measurement date and disposal date. If both are the same reporting period, then each component of the discontinued operations for PC and T. would be calculated for that date. However, if the measurement date and the disposal date are in different periods, then specific updates will be required to accurately document operations and other reporting functions such as depreciation and amortization. Since in this case the measurement date and disposal date will most likely be in two separate accounting periods, WB will have to adjust their gains/losses as well as later disposal gains or losses. As required under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, WB must evaluate the carrying value of PC and T. against the fair value, as determined by the market capitalization of the two companies at the official spin-off date. In this case, both PC and T. will qualify as discontinued operations because after the confirmation of the transaction neither will be a part of the business or parent company.

WB maintains a March 31 end of year and the stock sale was dated May of 2000 which may cause a reporting concern. It is crucial that WB reports these events properly for the sake of accuracy. WB will be responsible to verify if any changes occur in their end of year reporting under SFAS No. 131. "The registrant, in consultation with its counsel, is responsible for determining whether a fundamental change has occurred. The staff would not ordinarily expect a change in segment definitions after the balance sheet date to constitute a fundamental change. Accordingly, the staff would not ordinarily expect segment information to be recast until the historical financial statements include the period in which the change in segment definition occurred. However, disclosure of the nature and expected effects of the change would be required under Items 101 and 303 of Regulation S-K. (SEC Regulations Committee, 2001)