Sutter exiting SonomaOverview:Sutter Health, the Sacramento-based system, plans to close Sutter medical center of Santa Rosa and sell the center's Warrack Campus. Due to the $72 million losses incurred during the operation of the last 10 years, Sutter Health decided to pull out of the hospital market in the area of California's Sonoma Country by 2008. The deal of selling the Warrack Campus to its rival Santa Rosa Memorial was announced after negotiation, and the term of deal will be closed in 60 to 90 days.Issue: How to account for the closure of the Sutter medical center and the potential sale of Warrack Campus, whether they should be treated as discontinued operation or not. Specifically, Sutter medical center as disposed of and Warrack Campus is classified as "held for sale".According to CICA Handbook section 3475 (.27), the transactions or events should meet both of the following conditions to qualify as discontinued operations:The operations and cash flows of the component have been (or will be) eliminated from on going operations of the enterprise as a result of the disposal transactionThe enterprise will not have any significant continuing involvement in the operation of the component after the disposal transaction
Classify as Discontinued Operations
Do not classify as Discontinued Operations
Recognition (CICA 3475)
Separately operating in the area of Sonoma, the Sutter medical center and its Warrack Campus are distinguishable operating unit of Sutter Health. Moreover, their cash flows and financial elements are clearly distinguishable from the rest of the Sutter Health, since their losses of $72 million sine 1996 was calculated and presented in the case. For this reason, they qualify to be components of the business.
Sutter Health announced to close Sutter medical center and sell its Warrack Campus to its rival Santa Rosa Memorial by 2008. The operations and cash flows of the components will be eliminated and Sutter Health will not likely to have any continuing involvement in the operation.
The company would not announce this unless there was a formal plan that had been appropriately authorized by management
The hospital officials said they hope to complete the term of deal of Warrack Campus in 60 to 90 days. Therefore, it is available for immediate sale and the change of the plan is unlikely
Santa Rosa Memorial Hospital is committed to buy Warrack Campus, so possible buyer exitst.
The operating loss at 2005 was as high as $6.8 million, so the loss at 2006 will likely be material too.
Classifying as Discontinued Operations will lead to a higher "income before discontinued operations and extraordinary items" than treating it as ordinary items.
Presentation and Disclosure
Measured at the lower of carrying value or fair value less cost to sell. This impairment should be continued until it is sold.
Balance Sheet Presentation
Should be separately presented in Sutter Health's balance sheet.
Once Warrack Campus...