Definition
Discontinued Operations refer to the components of an entity that have been sold or permanently closed down. These components are reported separately in the financial statements to provide a clear distinction between ongoing operations and those that have been discontinued. Under Section 5 of the Financial Reporting Standard (FRS), a reporting entity’s profit and loss account should show both (i) the post-tax profit or loss arising from the discontinued operations and (ii) the post-tax gain or loss resulting from the sale or termination of these operations.
For UK-listed companies, International Financial Reporting Standard (IFRS) 5, Non-current Assets Held for Sale and Discontinued Operations applies.
Examples
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Company A Sells a Subsidiary: Company A decides to sell its subsidiary, which focuses on manufacturing electronics. The subsidiary is classified as a discontinued operation in the financial statements, and the resulting post-tax profit or loss from the sale along with the performance of the subsidiary up to the point of sale are separately reported.
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Permanent Closure of a Business Segment: A retail chain decides to permanently close down its underperforming stores in a specific region. The financial results of these stores, including any closure-related expenses, are classified as discontinued operations.
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Sale of a Division: A conglomerate sells off its automotive division. The division’s operations up to the sale and the gains or losses from the sale are reported under discontinued operations in the financial statements.
Frequently Asked Questions
1. Why are discontinued operations reported separately in financial statements? Discontinued operations are reported separately to provide clarity on the entity’s continuing performance and potential changes in operations. It helps stakeholders in making informed decisions by distinguishing between ongoing and discontinued activities.
2. How are gains or losses from discontinued operations calculated? Gains or losses from discontinued operations are calculated after accounting for taxes and include the operating results of the unit up to the point of sale or closure and any gains or losses realized upon selling or terminating the operation.
3. When should an operation be classified as discontinued? An operation should be classified as discontinued when it has been sold or permanently closed down or when it meets certain criteria for being classified as held for sale, per IFRS 5 standards.
4. How does the classification of discontinued operations impact comparability of financial statements? Since discontinued operations are reported separately, this can impact the comparability of year-to-year financial statements by isolating the performance of ongoing operations from those that have been discontinued.
Related Terms
- Continuing Operations: The ongoing activities and businesses of a company that are expected to continue in the future.
- Non-current Assets Held for Sale: Assets that are intended to be sold within a year and meet specific criteria for classification as held for sale.
- Profit and Loss Account: The financial statement that summarizes the revenues, costs, and expenses incurred during a specific period.
Online Resources
- Investopedia’s Guide to Discontinued Operations
- IFRS Official Website
- UK Financial Reporting Council Website
Suggested Books for Further Studies
- “Financial Accounting Theory and Analysis: Text and Cases” by Richard G. Schroeder, Myrtle W. Clark, and Jack M. Cathey
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Wiley IFRS 2023: Interpretation and Application of IFRS Standards” by PKF International Ltd
