Definition
A “discontinued operation” refers to a component of a business that has been sold, disposed of, or is held for sale in the near future. This component can be a product line, a geographical area, or a class of customers. The financial results of discontinued operations are reported separately in the income statement. This segregation is done to provide stakeholders with a clear view of the company’s continuing operations versus those that have been or will be divested.
Examples
Retail Chain: A national retail chain decides to sell its underperforming electronics segment. The results from this segment will be classified as a discontinued operation and shown separately in the financial statements.
Food Manufacturer: A food manufacturing company chooses to dispose of its non-core beverage division to focus on its primary food products line. The financial impact of this sale will be reported as a discontinued operation.
Telecommunications Firm: A telecommunications company in the process of exiting the international market and selling off its overseas operations will classify the financial results of these overseas operations as discontinued.
Frequently Asked Questions (FAQs)
1. What qualifies as a discontinued operation?
A component or segment of an entity that has either been disposed of or is classified as held for sale, resulting in a strategic shift or major line of business exit.
2. How are discontinued operations presented in the income statement?
They are shown as a separate line item after income from continuing operations and before extraordinary items to distinguish them from ongoing, normal business activities.
3. Why is it important to classify discontinued operations separately?
This classification provides clearer financial reporting, helping users of financial statements to better assess the core operational performance of the company.
4. What impacts investors when a company classifies something as a discontinued operation?
It indicates a strategic shift and helps investors understand that the portion of the company’s income will no longer contribute to future earnings.
5. Are there any special disclosures required for discontinued operations?
Yes, additional disclosures are typically required, including the specifics of the operations being discontinued and the expected timeline of disposal.
Related Terms
Continuing Operations: The parts of a business that are expected to continue in the foreseeable future.
Extraordinary Items: Uncommon and non-recurring items in the financial statements.
Held for Sale: Classification for assets intended by a company for sale rather than continuing use.
Segment Reporting: Financial reporting for different divisions or segments of a company.
Online Resources
- Investopedia: Discontinued Operation
- Financial Accounting Standards Board (FASB): Discontinued Operations
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield - Detailed chapters on various accounting principles, including discontinued operations.
- “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott - Great for understanding different aspects of financial reporting.
- “International Financial Reporting and Analysis” by Mark Haskins, Ken Ferris, and Thomas Selling - Insightful book for understanding financial reporting on a global scale.
Fundamentals of Discontinued Operation: Accounting Basics Quiz
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