Discontinued Operations
In financial accounting, discontinued operations refer to parts of a company’s core business or product line that have been divested or shut down, and which are reported separately from continuing operations on the income statement. A company may report discontinued operations under GAAP as long as two conditions are met: First, the transaction to shut down the divested business will result in eliminating the operations and cash flows of the divested business from company operations. Second, once it has been discontinued, the closed business must have no significant ongoing involvement with its operations. When companies merge, understanding which assets are being divested can give a clearer picture of how a company will make money in the future. Discontinued operations are listed separately on the income statement because it's important that investors can clearly distinguish the profits and cash flows from continuing operations from those activities that have ceased. This distinction is especially useful when companies merge, as parsing out which assets are being divested or folded gives a clearer picture of how a company will make money in the future. In financial accounting, discontinued operations refer to parts of a company’s core business or product line that have been divested or shut down, and which are reported separately from continuing operations on the income statement. On a company's income statement, discontinued operations are segregated from continuing operations so that investors may see clearly what money is inflowing from current operations vs. those which have ceased.
What Are Discontinued Operations?
In financial accounting, discontinued operations refer to parts of a company’s core business or product line that have been divested or shut down, and which are reported separately from continuing operations on the income statement.
Understanding Discontinued Operations
Discontinued operations are listed separately on the income statement because it's important that investors can clearly distinguish the profits and cash flows from continuing operations from those activities that have ceased.
This distinction is especially useful when companies merge, as parsing out which assets are being divested or folded gives a clearer picture of how a company will make money in the future.
On a company's income statement, discontinued operations are segregated from continuing operations so that investors may see clearly what money is inflowing from current operations vs. those which have ceased.
Disclosure on Income Statements
When operations are discontinued, a company has multiple line items to report on its financial statements. Although the business component is being shut down, it still could generate a gain or loss in the current accounting period.
The total gain or loss from the discontinued operations is thus reported, followed by the relevant income taxes. This tax is often a future tax benefit because discontinued operations often incur losses. To determine the company's total net income (NI), the gain or loss from discontinued operations is aggregated with that of continuing operations.
So as not to confuse adjustments to the financial statements that relate to previously reported discontinued operations, a company may classify the adjustments separately in the discontinued operations section of its financials. Adjustments may occur because of 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. Generally accepted accounting principles (GAAP) do not allow general corporate overhead to be allocated to discontinued operations.
Discontinued Operations Under GAAP
A company may report discontinued operations under GAAP as long as two conditions are met:
Discontinued Operations Under IFRS
The reporting rules under international financial reporting standards (IFRS) differ slightly from GAAP. A discontinued operation must meet two criteria:
Unlike GAAP reporting requirements, IFRS rules permit equity method investments to be classified as held for sale. Moreover, under IFRS, entities may continue involvement with the discontinued operation. As with GAAP, discontinued operations are reported in a special section of the income statement.
Related terms:
Accounting Entity
An accounting entity is a distinct economic unit that isolates the accounting of certain transactions from other subdivisions or accounting entities. read more
Cash Flow
Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business. read more
Contingent Asset
A contingent asset is a potential economic benefit that is dependent on future events out of a company’s control. read more
Continuous Operations
Continuous operations are activities of a company that are ongoing and sustained in the event of a business disruption. read more
Divestment
Divestment is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. read more
Equity Method & Example
The equity method is an accounting technique used by a company to record the profits earned through its investment in another company. read more
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of generally accepted accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements. read more
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are a set of accounting rules used by companies in 120 nations to make their public records transparent and comparable. read more
Income Statement : Uses & Examples
An income statement is one of the three major financial statements that reports a company's financial performance over a specific accounting period. read more