Option 1: A Codification Exercise on the Reporting of Discontinued Operations

THE CASE

ZD Consulting Services

ZD offers a variety of services for a broad base of clients in the areas of valuation, market research, and business plan implementation. ZD professionals spend significant time at client sites performing these services. The following table provides a breakdown of ZD's clients by industry:

ZD operates out of a small office that includes professionals from a wide variety of fields and a staff that is competent in all major business functions. Apart from the company's payroll costs, the major expense incurred by ZD is for the travel activities (i.e., transportation, lodging, meals, etc.) of the professionals as they carry out their commitments for clients. Although ZD's revenue growth has been sluggish in recent years, the company is responsible for approximately 20 percent of Dynamic's total revenues. Furthermore, ZD's earnings represent 10 percent of Dynamic's bottom line, and this relationship has not changed for the past five years.

During the first quarter of 2017, Dynamic became aware of market curiosity in ZD. In particular, a market competitor displayed considerable interest in purchasing the company. Intrigued by the level of attention, Dynamic management consented to initial due diligence, and in the process, it was revealed that the potential purchaser was especially drawn to the oil/gas services offered by ZD. Furthermore, the competitor informally indicated that this aspect of the business would fit well with its existing portfolio of clients within traditional oil/gas operations and channels. Ultimately, Dynamic received a very strong offer from the competitor for 100 percent of the shares of ZD, and on October 17, 2017, the sales transaction was completed.

With the sale of ZD, the Consulting segment of Dynamic consisted of only one company as of the end of 2017. This one remaining firm specializes in financial consulting for educational product companies. Specifically, professionals from this firm advise clients on a number of financial issues including intangible asset valuations, financial reporting compliance, and XBRL reporting.

Hope Industries

Hope Industries operates within Dynamic's Consumer Products segment, which includes five other subsidiaries. Two of the other five companies offer different types of travel products, with one manufacturing and selling deluxe luggage and the other specializing in travel food and beverage containers. Another company in the segment offers sporting goods and apparel, while a different entity within the same niche sells athletic supplies and equipment used by athletic trainers. Finally, another company serves the market for home products, producing and selling home dcor items such as scented candles and authentic picture frames. Overall, this sector has reported relatively slow growth during the past two years across all companies. Thus far, Dynamic management has no plans to dispose of these other five companies within the Consumer Products segment.

Hope Industries primarily manufactures and sells a variety of residential home products. Most notably, the company makes high-end home-improvement necessities such as painting trays, paint brushes, and other home maintenance goods. The synthetic materials used in these products are highly durable and can withstand very high temperatures resulting from the sanitation process, thus allowing consumers to maintain these products for an extensive period and through many projects. In order to produce such goods that pass durability tests and meet consumer expectations for design, the company uses a complicated and extensive injection-molding process. As such, the production environment requires large machinery along the assembly line and the molding process demands extreme temperatures in order to achieve the end result. Because of the elaborate design of many of the products, the company follows a complex, yet disciplined distribution process that includes extensive use of protective packaging materials (i.e., Styrofoam). In doing so, the company streamlined the distribution process so that there is very little spoilage of products as they move through the supply chain.

Ultimately, though, Hope Industries reports one of the five largest Scope 1 and 2 carbon emissions levels of all the companies included in Dynamic's portfolio of subsidiaries. These carbon levels also surpass the other five companies within the Consumer Products segment, as those companies emit carbon in relatively similar amounts. Hope operates in a very competitive market, which includes many other companies that offer such products. In addition, Hope faces threats from companies that manufacture similar products that are of a less-durable nature, but are sold at a lower price. During the last five years, consumers have indicated a preference for these less-durable products in order to allocate their disposable income to other products and activities. As such, Hope, which has always operated on tight margins, has seen its profits diminish. During 2016, the company reported an overall loss on its income statement, joining the other home products company as the only two within the Consumer Products segment to post net losses.

In January 2017, Dynamic management became interested in a budding phenomenon: disposable kitchenware products. In conducting market research, Dynamic professionals concluded that consumers desired products such as spatulas, mixing bowls, etc., that are designed for one-time use. Meetings with a local research and development (R&D) firm that was currently working on a process to produce similar types of goods that are eco-friendly confirmed this decision. Such convenience would allow consumers to accomplish their personal culinary goals without the hassle of cleaning kitchenware. Consistent with CEO Cruz's focus outlined in the shareholder meeting, Dynamic set out to acquire the necessary technology from the R&D firm, tailor it specifically to kitchenware products, and produce those goods in an eco-friendly fashion. Ultimately, the company made the decision to move forward with plans to produce these products with recycled and biodegradable materials. A lingering issue, however, was the location of this new manufacturing operation.

Upon further review, Dynamic management determined that it possessed the infrastructure (manufacturing facilities) within Hope Industries to support this venture. However, in order to produce the new products, management was aware that it must ( 1) suspend all manufacturing of Hope's current product mix and ( 2) completely replace the machinery currently used at Hope. Additionally, the new manufacturing process would require a certain type of skilled labor that the Hope employees do not presently possess. One of the hallmarks of Dynamic, within the sphere of conglomerate organizations, is the fair treatment of its personnel across all subsidiaries. Along those lines, Dynamic management determined that the termination of current employees to facilitate the required skills was not an option. Rather, Dynamic proposed a large-scale investment in Hope by establishing a comprehensive training program for all of its current employees. The program provided the necessary education for the laborers to acquire the appropriate skills for the manufacturing process. Additionally, the company supplied training to support staff (i.e., accounting, HR, IT, etc.).

In order to make this switch to kitchenware products a reality, Dynamic's management approached a neighboring competitor that manufactures the less-durable version of the home improvement products. The competitor expressed an interest in expanding to the highly durable products currently offered by Hope. On May 14, 2017, the competitor agreed to a layered purchase of Hope's inventory, fixed assets (including machinery, equipment, and patents), information about manufacturing processes, and limited support information (including the purchasing and sales modules of the accounting system), according to the following schedule:

Hope suspended its production of residential products on May 14, 2017. In the midst of the transaction with the competitor, Hope continued to sell the remaining inventory, per the agreement, until August 30, 2017, at which time the competitor assumed the remaining inventory. During this process, Hope purchased plans from the local R&D firm, instituted training programs for personnel, and purchased machinery/equipment that was conducive to the manufacture of the new kitchenware products. Manufacturing of the kitchenware products commenced in the middle of July 2017. Due to the overlap between the suspension of activities related to the residential products and the commencement of kitchenware production, Hope accounting personnel were unable to efficiently separate the specific support operations (aside from the sale of the inventory) of the two activities for the second half of 2017 within the accounting system. However, the staff was able to estimate the costs of these separate operations based upon trends from prior years.

According to Dynamic's global responsibility report for 2017, carbon emissions for Hope dropped slightly in Q4. While Dynamic believes that the new focus on kitchenware will prove a wise investment, the company expects a return to profitability to be a multi-year process. During the next year, Dynamic plans to change Hope Industries' name to Hope Home Products, Inc.

AM Mining Operations

Dynamic owns a copper mining operation in the southwestern region of the United States. The operation includes several properties that are actively mining and producing copper, and the most lucrative of them all is one that accounts for 80 percent of the production. The name of this mine is Abby Marie (AM), the source of the company's formal name. While the company is very profitable, it also has a substantial impact on the environment, and in the past several years, AM has reported one of the five largest Scope 1 and 2 carbon emissions among Dynamic companies. Furthermore, AM is subject to significant regulations that are related to environmental and safety issues. As an example, AM is required to complete a round of regulatory audits at about the same time every five years. These audits focus on key issues such as the environmental impact of AM's mining activities, occupational hazard and safety accreditation, and hazardous waste certifications. AM management is committed to facilitating these regulatory activities, as these audits are a crucial piece of the company's business plan. In fact, the company has received clean audit results on each audit since the company's inception. The regulators have notified AM management that a new round of audits will commence during 2018. Normally, the regulators schedule their work toward the end of the year; however, they will schedule the audit earlier in the year if the company has scheduling issues or other extenuating circumstances exist. These regulatory activities are very extensive, often resulting in multiple site visits and significant costs. As such, the process of facilitating the government inspections to the receipt of the different agencies' reports can take up to nine months, depending upon the level of complications that arise.

In Q2 of 2017, Dynamic made the decision to put the company up for sale. Management believes that AM has a sales value consistent with an earnings multiple2 [ 4] of 4.3. After obtaining approval to move forward with plans for AM's disposal from the corporate governance functions of both Dynamic and AM, Dynamic management requested the services of XJ Equity Brokers, Inc. to find an interested buyer. While XJ has never brokered a transaction in the mining industry, the firm has represented Dynamic extensively in its merger and acquisition activities. XJ professionals indicate that since the mining operations are very unique, they will need to conduct a considerable search to find buyers in the market for such a company. Furthermore, they concluded that management's valuation (i.e., the 4.3 multiple) was much too aggressive, given recent comparative analyses obtained by XJ from their network of resources. As a result, XJ plans to present the AM opportunity to investors with a 3.6 multiple, which the firm feels is a reasonable valuation. Given the nature of AM's operations and the environment in which the company operates, the professionals at XJ believe the sale of AM will likely take several months to complete.

Dynamic believes that the management of AM has been very satisfactory, allowing an experienced industry participant to operate AM in its present condition without substantial alterations to the business plan. As of 12/31/17, XJ had found three potential buyers, and two of those interested parties have signed non-disclosure agreements in order to learn more about the possible acquisition. According to XJ, the potential buyers would normally need about 46 months for due diligence in order to make a purchase commitment. However, the interested parties also mentioned that the results of the regulatory activities would play a major role in their intentions to move forward, as their ability to get operating permits transferred would be contingent upon clean audit opinions. In response, management indicated it would promptly schedule the audits for Q1 2018 if either party provided a purchase/sale agreement contingent upon audit results.

Case Requirements:

During the first week of 20X8, Dynamics corporate controller, Anne Smith, prepares to initiate the closing activities for 20X7.

As Ms. Smith awaits the final financial statement numbers prepared by the reporting personnel at each subsidiary, she is anxious to determine the appropriate financial statement presentation of the three subsidiaries discussed above. Most specifically, she is curious as to whether the financial performance of each of the three subsidiaries qualifies for reporting under discontinued operations. Ms. Smith has asked you to review the intricacies of ZD Consulting, Hope Industries, and AM Mining Operations to determine which type of reporting (i.e., continuing operations versus discontinued operations) is appropriate for each subsidiary on Dynamics consolidated income statement.

To complete the case requirements, you should perform the following tasks:

• Consider the facts presented for each company within the case.
• Consult the FASB Accounting Standards Codification for guidance on the specific income statement presentation issue to which the controller has requested answers.
• Prepare a memo that clearly addresses the issue, discusses each companys facts, and provides a clear conclusion regarding the appropriate presentation of each companys financial information on Dynamics consolidated income statement.

In constructing this memo, you should expect to incorporate Accounting Standards Codification references as required to support your conclusions.

Include any basic calculations used in your analysis from the data provided as part of your submission.