Discontinued Operations

Discontinued operations occur when a company disposes of, or plans to dispose of, a relatively large component of its business, such as an operating unit or geographical segment. Including these segments with continuing operations would mislead investors about the sustainability of earnings.

IAS 35, Discontinuing Operations, is similar to the requirement under U.S. GAAP. Both require extensive disclosures once a company has entered into an agreement to sell a segment or the board of directors has approved and announced the planned discontinuance. This could entail a sale, disposal, or phasing out of a major business segment, but the elimination of individual products, services, or locations does not qualify. For example, a company that operates restaurants and manufactures golf clubs decides to sell the golf club operations and close several restaurants in its largest territory. Only the sale of the golf club business would be considered a discontinued operation.

Under IAS 35, the following activities would generally not be classified as discontinued operations:

• Gradual or evolutionary phasing out of a product line or class of service.
• Discontinuance, even if relatively abruptly, of several products within an ongoing line of business.
• Shifting of some production or marketing activities for a particular line of business from one location to another.
• Closing of a facility to achieve productivity improvements or other cost savings.
• Selling a subsidiary whose activities are similar to those of the parent or other subsidiaries.

The IAS regulation requires that the revenue, expenses, pretax income, and related income taxes of the discontinued operations be displayed separately on the face of the income statement. This can be shown in a separate column or section of the income statement. U.S. standards require presentation at the bottom of the income statement on a net of tax basis with related footnote disclosures.

For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis

See also:
  • Reconciling Net Income to Cash Flow From Operations: Noncash Adjustments
  • Unusual or Extraordinary Items
  • Net Change in Cash (Overall Cash Flow)
  • Retained Earnings
  • Cash Flow Ratios
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