University of Maryland: Dynamic Inc. ZD Consulting Services Disposal

This report analyzes the disposal of ZD Consulting Services, a subsidiary of Dynamic Inc., and its implications for financial reporting. The analysis focuses on how the disposal of ZD, which represents a strategic shift for Dynamic Inc., should be presented as discontinued operations on the company's financial statements for the year ended December 31, 2017. The report references U.S. GAAP (FASB ASC 205-20) to determine the proper accounting treatment, including the separation of continuing and discontinued operations on the income statement, balance sheet, and statement of cash flows. It addresses the reporting of gains or losses on disposal, intercompany transactions, and required disclosures. The report concludes that the disposal meets the criteria for discontinued operations, emphasizing the strategic shift in Dynamic Inc.'s focus toward sustainable products and services and the impact of the sale on the company's financials. The report also highlights the importance of providing clear information to stakeholders regarding the discontinued operations and their impact on the company's future.

Running head: DYNAMIC INC.: ZD CONSULTING SERVICES 1
Dynamic Inc.: ZD Consulting Services
University of Maryland Global Campus

Dynamic Inc.: ZD Consulting Services 2
Dynamic Inc.: ZD Consulting Services
Financial Reporting usually focuses on the results of continuing operations. However,
occasionally businesses sell or divest a component or a product line. If those transactions agree
with certain criteria under U.S. Generally Accepted Accounting Principles (GAAP), they should
be reported as discontinued operations on the financial statements. Per FASB ASC 205-20-45-
1A: “A discontinued operation may include a component of an entity or a group of components
of an entity, or a business or nonprofit activity” (FASB 2014). Moreover, the disposal should be
reported in discontinued operations if the disposal represents a strategic shift that has major
effect on the entity’s operations when the component is classified as held for sale, disposed of by
sale, or disposed of other than sale according to ASC 205-20-45-1B. In this memo, I will be
analyzing ZD Consulting Services and how the disposal of this subsidiary will be represented on
Dynamic Inc. income statement for the year ended December 31,2017.
Dynamic Inc. is a large, multinational corporation that owns subsidiary companies and is
active in different markets around the world. In 2017, Dynamic Inc. has two subsidiaries that
provide consulting services to a wide range of clients, one of which is ZD Consulting Services.
Dynamic Inc. has a controlling interest of 100% in all the subsidiaries. ZD’s revenue in 2016 was
21,558 million dollars, assets during the same period were 7,641 million dollars, and Scope 1
and 2 Carbon Emissions amounted to 819,185. ZD represents 20% of Dynamic’s total revenue
and earnings of 10% of the company’s bottom line. 41% of the ZD’s revenue is generated from
the clients in the oil/ gas industry. ZD subsidiary operates out of a small office, where
professionals travel to serve their clients

Dynamic Inc.: ZD Consulting Services 3
Dynamic Inc. CEO shared in his meeting with shareholders in Q1 of 2017 the company’s
strategic shift. This shift will be focused on investments that promote sustainable products and
services as well as sustainable business operations. ZD’s revenue has been slow in the recent
years. Based on the Dynamic’s strategic shift and the new high standards using natural resources,
the company will be disposing off any subsidiary that is considered underperformed. ZD was one
of the components that considered for disposal. Dynamic management received a very strong
offer from a major competitor to buy 100% of the shares of ZD and on October 17, 2017, the
deal was completed. In Addition, and as one of the two subsidiaries in the consulting segment,
the sale of ZD terminated several unique consulting services to dynamic. In addition, based on
ASC 205-20, an example of what may constitute a strategic shift is the sale of a product line that
represent 15% of total revenue (SEC 2015). Therefore, the disposal is considered a strategic shift
as it will affect Dynamic’s operations and financials.
This discontinued operation will have to get special treatment on of Dynamic Inc.
financial statements. In general, lenders, stockholders, and potential investors look at the income
statement to get an insight of where the business is headed. The disposed part of the business
indicates that it is not part of the future of the company and they should be separated out and
disclosed. Also, this should be communicated to users of the financial statements to clarify that
only income from continuing operations should be expected to be earned going forward.
The Financial Accounting Standards Board Accounting Standards Codification offers
guidance on the reporting of continuing and discontinued operations in the various entities within
a specified period. According to ASC 202-20-05-2 the required disclosure about the discontinued
operations depends on the nature of the operations. For example, if the disposal includes a
component or a group of components that is not an equity method investment, disclose should be

Dynamic Inc.: ZD Consulting Services 4
more comprehensive. If the disposal includes an equity method investment and is held for sale,
limited disclosure is required.
For that, Dynamic Inc. will be reporting the disposal of ZD subsidiary under discontinued
operation separate from continued operation on the balance sheet, income statement, and
statement of cash flow.
The assets and liabilities of the discontinued operation of ZD should be presented
separately in the asset and liabilities section of the balance sheet. “In the period (s) that a
discontinued operation is classified as held for sale and for all prior periods presented, the assets
and liabilities of the discontinued operation shall be presented separately in the asset and liability
sections, respectively, of the statement of financial position.” (Financial Accounting Standards
Board [FASB], 2014, 205-20-45- 10).
Dynamic should separate continuing operations from discontinued operation on the
income statement to allow investors to distinguish between the inflow of the current operations
and what has been disposed of. As ZD was sold by the last quarter of 2017, Dynamic should
report multiple line items on its financial statements as ZD still generate loss, based on the case,
in the current year. On the income statement and for all the periods presented, Dynamic Inc.
should present the results of discontinued operations net of tax separately from continued
operations: ” The results of all discontinued operations, less applicable income taxes (benefit),
shall be reported as a separate component of income” (FASB ASC 205-20-45-3A).
Dynamic received a very strong offer from the buyer that results in a gain on sale. The
gain on disposal may be presented separately on the income statement or disclosed in the notes to
the financial statement. If it is disclosed in the notes, the discontinued operations will be shown
as a single line item on the income statement, including the gain (FASB ASC 205-20-45-3B).

Dynamic Inc.: ZD Consulting Services 5
Furthermore, in order to recognize Dynamic’s net income, the gain or loss from the discontinued
operations should be aggregate with continuing operations.
Afterwards, I am assuming adjustments may be necessary for any contingent contract
terms. Dynamic should make the adjustments by separating the continuing operations from
discontinued operations. Also, payroll costs and travel activities expenses of the professionals at
ZD office, should be allocated to discontinued operations. Dynamic’s net income from
discontinued operations will disclose the profit or loss made during the year from business lines
that are disposed of and will no longer be on the company’s books.
Dynamic may report cash flows from discontinued operations separately in the statement
of cash flow, or in combination with continuing operations. Specific disclosures are required
regarding the total operating and investing cash flows of the discontinued operations and other
items if not reported separately. Dynamic should report the pretax gains or losses from the
disposal of ZD in the same manner it reports gain or losses from other investments assets.
Therefore, Dynamic should either disclose proceeds from the disposal as an investing activity,
and the gain and loss before income tax as reconciling item in the reconciliation of net income to
net cash from operating activities (FASB ASC 205-20-50-5B). I believe that Dynamic and ZD
have intercompany transactions related to consultation services; those transaction would be
eliminated in consolidation after the disposal.
The disposal of ZD should be reported as discontinued operations on the consolidated
financial statements of Dynamic Inc. for the year ended December 31, 2017. In my opinion, the
disposal of ZD subsidiary met the criteria outlined in FASB ASC 205-20-45-1B. The
circumstances of the disposal based on the facts in the case represents that the disposal has a
strategic shift on Dynamic’s operations and financials. Dynamic should follow the guideline

Dynamic Inc.: ZD Consulting Services 6
presented by ASC 205-20-50-1 and disclose a description of the facts and circumstances leading
to the disposal and the expected manner and timing of the disposal (FASB ASC 205-20-45-1E).
It also should disclose the gain or loss recognized.

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References
Casey J. McNellis (2018) Dynamic Divestures: A codification exercise on the reporting of
discontinued operations. Issues in Accounting Education, February 2018, Vol. 33, No. 1,
pp. 38-43.
FASB (Financial Accounting Standards Board). (2014). Accounting Standards Codification
(ASC 205-20-45). Retrieved from https://asc.fasb.org/link&sourceid=SL51727471-
159037&objid=109128105
Remarks before the 2015 AICPA national conference on current SEC and PCAOB
developments. (2015, December 9). Retrieved from
https://www.sec.gov/news/speech/remarks-at-2015-aicpa-conference-kanczuker.html