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.
Definition: In financial accounting, Discontinued Operations refer to a part of a company's core business or product line that has been divested or shut down, and is reported separately from continuing operations on the income statement. The financial results of discontinued operations typically include the operating profit or loss of the business, the gain or loss on disposal or closure, and the related tax effects.
Origin: The concept of discontinued operations originated in the mid-20th century as corporate mergers and restructuring activities increased, necessitating clearer financial reporting to distinguish between continuing and discontinued operations. Both International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) have detailed guidelines on reporting discontinued operations.
Categories and Characteristics: Discontinued operations can be categorized as follows:
- Divestiture: The company sells a business or product line to another company.
- Closure: The company decides to cease operations of a business or product line.
- Reported separately from continuing operations, allowing investors and management to assess the performance of the core business more accurately.
- Typically involves one-time gains or losses, such as gains from asset sales or costs associated with closing the business.
- Requires disclosure of related tax effects.
Specific Cases:
- Case 1: A tech company decides to sell its unprofitable mobile phone business. The company reports the operating profit or loss, the gain on sale, and the related tax effects of the mobile phone business separately on the income statement, helping investors better understand the performance of its core businesses, such as software and services.
- Case 2: A retail company decides to close all its stores in a particular region. The costs associated with the closure (e.g., employee severance, lease termination fees) and the related tax effects are reported separately on the income statement, preventing confusion with the financial performance of continuing operations.
Common Questions:
- Why report discontinued operations separately from continuing operations? This helps investors and management more accurately assess the performance of the company's core business, avoiding the impact of one-time events on financial results.
- How do the financial results of discontinued operations affect the company's overall financial performance? The financial results of discontinued operations are reported separately on the income statement but still affect the company's net income and earnings per share.
