What are 'Discontinued Operations'
A discontinued operation occurs when a segment or certain product line in a company's business has been sold, disposed of or abandoned and is subsequently reported on the company's income statement as income separate from continued operations. Because income from discontinued operations is listed separately on the income statement, investors are less likely to be misled as to the source of a company's profit. This is especially useful when companies merge, since parsing out which assets are being divested or folded up gives a clearer picture of how a company will make money in the future.
BREAKING DOWN 'Discontinued Operations'Discontinued operations should not be recorded as extraordinary items on the financial statements. Adjustments to the financial statements relating to previously reported discontinued operations may occur by classifying the adjustments separately in the discontinued operations section. These adjustments for discontinued operations may occur due to benefit plan obligations, contingent liabilities or contingent contract terms.
Discontinued Operations Under Generally Accepted Accounting Principles
Discontinued operations are reported under GAAP as long as two conditions are met. First, the component or asset being disposed of or sold must be completely removed from company operations. This indicates no future cash flows must result from this component. Second, upon the completion of the removal of the component or asset, the disposing company has no continuing involvement with the item. Upon meeting these two conditions, discontinued operations are required to be reported on the income statement. Both current period and prior period operations are disclosed in the discontinued operations section.
Discontinued Operations Under International Financial Reporting Standards
As of June 2016, IFRS rules are slightly different than GAAP regulations. A discontinued operation must meet two criteria. First, the asset or component must be disposed of or reported as being held for sale. Second, the component must be a distinguishable separate area of business intentionally being removed from operation or a subsidiary of a component being held with the intention of selling. Unlike GAAP reporting requirements, IFRS rules permit equity method investments to be classified as held for sale. In addition, entities may continue involvement with the component under IFRS. Similar to GAAP, discontinued operations are reported in a special section of the income statement.
Disclosure on Income Statement
There are multiple line items to report on an entity's financial statements when discontinued operations occur. First, continuing operations are distinguished from discontinued operations. Although the component is being disposed of, the company had the potential to incur a gain or loss in the current reporting period. Therefore, both the pre-tax and after-tax earnings are reported. Next, discontinued operations are reported. The total gain or loss from the discontinued operations is reported followed by the relevant income taxes. The income tax is often a future tax benefit as discontinued operations tend to result in losses. The gain or loss on discontinued operations is aggregated with the result of continuing operations to determine total company net income.