What are Discontinued Operations

Discontinued operations are a component of a company’s core business or product lines that has been disposed of, and is reported separately from continued operations on the income statement.

BREAKING DOWN Discontinued Operations

Discontinued operations are listed separately on the income statement from continuing operations, so investors can clearly distinguish the profits and cash flows from continuing operations from activities that have ceased. 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.

Disclosure on Income Statement

There are multiple line items to report on an entity's financial statements when operations are discontinued. Although the business component is being disposed of, it could still generate a gain or loss in the current accounting period. Therefore, the total gain or loss from the discontinued operations is reported, followed by the relevant income taxes. This tax is often a future tax benefit because discontinued operations are often loss making. The gain or loss on discontinued operations is aggregated with the result of continuing operations to determine the company's total net income.

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 may occur due to benefit plan obligations, contingent liabilities or contingent contract terms. If the buyer of a discontinued operation assumes the debt associated with the operation, any interest expense before the sale is allocated to discontinued operations. GAAP does not allow the allocation of general corporate overhead to discontinued operations.

Discontinued Operations Under GAAP

Discontinued operations are reported under generally accepted accounting principles (GAAP), as long as two conditions are met. First, the disposal transaction will result in the operations and cash flows of the component being eliminated from company operations. Second, once it has been discontinued, a company must have no significant continuing involvement with the operations of the component. If these two conditions are met, discontinued operations must be reported as discontinued operations on the financial statement.

Discontinued Operations Under IFRS

As of June 2016, International Financial Reporting Standards (IFRS) rules differ slightly from GAAP. 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 discontinued operation under IFRS. Like GAAP, discontinued operations are reported in a special section of the income statement.