Background on Accounting for Divestitures:

Step 1: Divestiture Overview Divestitures, also known as asset sales or spin-offs, are strategic decisions made by companies to sell, spin off, or otherwise dispose of business units or assets. These actions are often taken to streamline operations, focus on core competencies, reduce debt, or respond to changing market conditions. Divestitures can involve the sale of subsidiaries, divisions, or product lines and can take various forms, including equity carve-outs, spin-offs, and outright sales.

Step 2: Accounting Methods for Divestitures When a company decides to divest, proper accounting treatment is essential to accurately reflect the financial impact of the transaction. Generally, there are two main accounting methods used for divestitures:

a. Historical Cost Method: This method involves recording the assets and liabilities of the divested business at their historical cost on the company's books. The gain or loss on the sale is then calculated as the difference between the historical cost and the sale proceeds.

b. Fair Value Method: Under this method, the assets and liabilities of the divested business are recorded at their fair market value at the time of the divestiture. The gain or loss is determined by comparing the fair value of the divested assets and liabilities to the sale proceeds.

Step 3: Financial Reporting and Disclosures Proper financial reporting and disclosures are crucial aspects of accounting for divestitures. Companies must transparently communicate the details of the divestiture in their financial statements and footnotes. This includes providing information on the gain or loss from the divestiture, the impact on financial performance, and any continuing involvement the company might have with the divested assets or business.

Objective Type Question:

Which accounting method for divestitures involves recording the assets and liabilities of the divested business at their historical cost on the company's books? 

A. Fair Value Method 

B. Equity Method 

C. Historical Cost Method 

D. Market Value Method

 

Choose the correct option and provide a brief explanation for your choice