TO: Dr Vanda *-Pauwels
FROM: A. Charity Chappell
DATE: June 22, 2015
SUBJECT: Closing Pit Stop Center affect on second quarter financials.
Auto World Inc, a SEC registrant, has decided to close one of their operating units, Pit Stop Service & Tire Centers (Pit Stop Centers) which consists of 30 service centers that offer service labor and install merchandise and tires. Pit Stop Centers advertise and are in separate locations, though close proximity, from the Auto World Inc's other operating unit, Auto Boyz Retail Centers which consist of 90 stores that focus on the retail sales for individual who wish to do it themselves. The decision to close the Pit Stop Centers was announced on April 15, with closure of all Pit Stops Centers by June 30 of that same year. Though instead of closing down the Pit Stop Centers and allowing the revenue from the customers to go to another competitor, Auto World Inc has decided migrate them to Auto Boyz Retail Centers though targeted advertising via coupons, online tactics, and flyers mailed out to their homes. In their press release Auto World Inc also announced that it would transition as many current employees as needed from Pit Stop Centers to Auto Boyz Retail, in order fulfill the new need at Auto Boyz Retail. The combination of all their restructuring efforts would initially cost around $52 million pre-tax associated with the termination of operating leases though an approximate increase in earnings of $58 million is projected for the year in which the closures take place and a projected increase of $67 million in operating earnings every year thereafter. In sales of automotive services there is a projected to be $600 million in continuing cash flow after the disposal; whereas, if the disposal never occurred, Pit Stop Centers was looking at approximately $700 million in sales. This memo deems to satisfy the question of if the Pit Stop Closures should be reported as a discontinued operation of a component of an entity in Auto Worlds second quarter financial statements and any additional recommendations the need to be relayed to Auto World Inc.
First to classify something as a component of an entity, under ASC 205-20-20 Glossary, it must have operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes from the rest of the entity. As the Pit Stop Centers meet all of the criteria for a component of an entity we move on to if it should be classified as a discontinued operation. According to Accounting Standards Update No. 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity the Pit Stop Center closures fail to qualify as a discontinued operation of a component of an entity laid out in 205-20-45-1b: a disposal of a component of an entity or a group of components of an entity shall be reported in a discontinued operations if the disposal represents a strategic shift that has a major effect on an entity's operations and financial results when any of the following occurs:
a) The components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale, (which Pit Stop did not as it was not sold to anyone just closed with customer migration).
b) The component of an entity is disposed of by sale, (once again it was not sold only closed so does not meet this point).