Discontinued Operations

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.

RELATED TERMS
  1. Headline Earnings

    A basis for measuring earnings per share implemented by the Institute ...
  2. Distress Price

    When a firm chooses to mark down the price of an item or service ...
  3. Continuing Operations

    Continuing operations is a business term used to describe the ...
  4. Operating Income

    The amount of profit realized from a business's operations after ...
  5. Operating Loss - OL

    The net loss recorded as a result of a company's unprofitable ...
  6. Income From Operations - IFO

    The profit realized from a business' own operations. Income from ...
Related Articles
  1. Investing

    What are Operating Expenses?

    An operating expense is any expenditure made for the purpose of operating a business. These expenses are the day-to-day costs that help keep the business going. Operating expenses are reflected ...
  2. Investing

    What is Operating Revenue?

    Operating revenue is income that’s derived from sources related to a company’s everyday business operations.
  3. Investing

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  4. Investing

    Calculating Operating Ratio

    An operating ratio compares a company’s operating expenses to its net sales.
  5. Investing

    Accounting Basics: Financial Statements

    By Bob Schneider Financial statements present the results of operations and the financial position of the company. Four statements are commonly prepared by publicly-traded companies: balance ...
  6. Markets

    Operating Profit

    Operating profit is the profit generated from the core business of a company before accounting for interest and taxes.
  7. Investing

    Net Operating Income

    Net operating income (NOI) reflects income after operating expenses are deducted, but before income taxes and interest are deducted.
  8. Investing

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  9. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  10. Markets

    How To Evaluate The Quality Of EPS

    Companies can manipulate their numbers, so you need to learn how to determine the accuracy of EPS.
RELATED FAQS
  1. What is the accounting treatment for discontinued operations in IFRS and U.S. GAAP?

    Find out what accountants define as "discontinued operations" under US GAAP and IFRS and the differences that exist between ... Read Answer >>
  2. What are the differences between operating profit and operating income?

    Learn how operating income, also known as operating profit, is determined. Also, see how investors use this number on the ... Read Answer >>
  3. What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

    Learn what operating cash flow and net operating income are, how the two metrics are calculated and the main difference between ... Read Answer >>
  4. What is the difference between operating income and operating profit?

    Find out why operating margin and operating income can be treated synonymously with EBIT, but how they all differ from operating ... Read Answer >>
  5. What is the difference between operating income and gross profit?

    Learn more about the difference between operating income and gross profit, two accounting figures that appear on a company's ... Read Answer >>
  6. What are examples of key operating activities in a company?

    Discover the things that make up a company's operating activities, including examples of some the key operating activities ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center