Method of Disposal Not Determined

APB Opinion No. 30, Reporting the Results of Operations, requires a plan of disposal of a business segment to include the expected method of disposal. Any estimated gains or losses on disposal will vary depending on the method used for disposal. The SEC Staff concludes that plans that do not specify the method of disposal are not adequate enough to provide a reasonable estimate of expected losses. Therefore, such plans do not satisfy the requirements of APB No. 30 for presentation as discontinued operations.

Plan of Disposal to Take More Than One Year

The Staff believes a segment should not be presented as discontinued operations in situations in which the plan of disposal requires more than one year. APB No. 30 requires recognition of estimated losses expected to be realized at the measurement date. For management to properly estimate expected losses on disposal of a segment, they must develop estimates of the disposal date, amount of proceeds expected, contingencies remaining after disposal, and operating results through the expected disposal date. The Staff believes it will not be possible to develop sufficiently reliable estimates if the plan of disposal extends beyond a 12-month period. Also, plans that extend beyond one year will be inconsistent with the APB Opinion No. 30 requirement that a qualifying plan include an active program to find a buyer if the method of disposal is by sale. Lastly, the Staff believes reporting a segment as discontinued operations will misstate the company's operating results if the company intends to continue operating the segment for a period greater than one year. Therefore, in situations in which the planned disposal requires more than one year, the company should include the operating results of the segment as part of continuing operations.

Accounting for the Abandonment of Business Segment

The Staff addressed the issue of whether the wind-down of a business segment may be accounted for as a discontinued business. It is their opinion that the segment will constitute discontinued operations if the company will stop accepting new business within a 12-month period from the measurement date. Continuation of servicing clients under long-term contracts existing as of the measurement date does not constitute new business. The segment may be reported as discontinued operations even if the company continues to service these customers for several years after the measurement date. However, in periods during which the residual operations of the discontinued segment is relatively material to that of continuing operations, summarized disclosure of its operating results should be presented in the notes to the financial statements. Summarized disclosure should include revenues, costs of revenues, other expenses, and an adjustment for the estimated loss recognized at the measurement date.

Significant Interest Retained in Disposed Segment

The disposal of a controlling interest in a subsidiary, with the retention of a minority voting interest - directly or indirectly - in the segment, may not qualify as discontinued operations in situations in which the voting interest enables the company to exert significant influence over the segment. In this situation, the company should account for the transaction as a disposal of a portion of a line of business, and its effects should be classified as continuing operations. APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, requires the company to use the equity method to account for its investment in the segment.

Contingencies Relating to Discontinued Operations

It is the conclusion of the SEC Staff that estimates of contingent liabilities or contingent assets that remain after disposal of a segment that arose pursuant to the terms of the disposal should be classified within discontinued operations. Paragraph 25 of APB Opinion No. 30 requires that subsequent adjustment of the loss on disposal be classified in the same manner as the original item. The Staff expects the following information to be disclosed regarding contingencies.

In the MD&A section of filings:

* Known trends, events, and uncertainties that may affect liquidity, financial condition, and results of operations related to discontinued operations.

* A discussion of the impact of changes in the plan of disposal, or changes in circumstance related to the plan.

* If a direct or indirect material interest is retained in the discontinued business by the seller, a discussion of known trends, events, and uncertainties that may effect the amount ultimately realized must be disclosed.

In notes to the financial statements:

* Material contingent liabilities.

* Reasonable likely range of possible losses on such contingencies in accordance with SFAS No. 5, Accounting for Contingencies.

The Staff also concludes that gains and losses, dividend and interest income, and portfolio management expenses associated with the assets received as consideration for the segment disposed of should be reported as income from continuing operations.

Subsidiaries to Be Sold

According to the SEC Staff, subsidiaries that management intends to sell that do not meet the requirements of APB Opinion No. 30 should be consolidated. Although SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries, states that subsidiaries should not be consolidated if control is likely to be temporary; the Staff believes that SFAS No. 94 does not encompass situations involving planned disposition of subsidiaries. They believe APB Opinion No. 30 governs planned disposition of subsidiaries and not SFAS No. 94.

Spin-Off of Subsidiary

It is the Staff's view that disposition of a subsidiary in a spin-off transaction should generally be accounted for as discontinued operations. A spin-off occurs when a company disposes of a business by distributing the subsidiary's stock to the company's shareholders on a pro rata basis. Such transactions should be reported as discontinued operations and not as a change in reporting entity. The historical financial statements should not be restated as if the company never had an investment in the subsidiary as promulgated by APB Opinion No. 20, Accounting Changes. However, in limited situations involving the initial registration of a company, retroactive restatement of prior years' financial statements may be permitted when the company and subsidiary are in dissimilar businesses and are autonomous after the spin-off, both financially and operationally.

It is important to note that staff accounting bulletins are not rules or interpretation of the Commission, but are interpretations and practices followed by the Division of Corporate Finance and the Office of the Chief Accountant of the SEC. Although SAB 93 does not have the effect of law, it does provide guidance to accountants on the various issues addressed.

Boadnarine Bharosay, CPA, is an assistant professor at York College, The City University of New York.