Income from Discontinued Operations
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Income from Discontinued Operations: Meaning, Example, and Reporting in Income Statement

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Income from Discontinued Operations: When a company decides to sell or shut down a major part of its business, that section is called a discontinued operation. The financial results from this part are shown separately in the income statement, net of tax, so readers can easily see what part of the company’s profit came from its ongoing business and what came from the discontinued section.

Reporting discontinued operations separately helps investors and stakeholders understand a company’s future earnings potential more clearly.

🔹 What Is a Discontinued Operation?

A discontinued operation can include:

  • A component of a company
  • A group of components
  • A complete business or nonprofit activity

It qualifies as “discontinued” when it has either:
✅ Been sold, or
✅ Been classified as held for sale (meaning management plans to sell it soon).

These results are presented below income from continuing operations in the income statement, net of tax.

🔹 When to Classify a Business as a Discontinued Operation

To qualify, the sale or closure must represent a strategic shift that has or will have a major effect on the company’s operations and financial results.

Examples of a Strategic Shift:

  • Selling a major geographical area
  • Selling a major business line
  • Selling a large investment

👉 All related costs are recorded when the company is obligated to pay them, not just when a plan to sell is announced.

🧩 Discontinued Operations Example: Emm-Serv Inc.

Emm-Serv Inc., a frozen food supplier, serves clients ranging from fast-food restaurants to hospitals. Its fast-food division has always generated the highest revenue and profit.

However, as public demand shifts toward healthier food options, Emm-Serv decides to sell its fast-food division and focus on restaurants offering healthier menus.

Because this division represents the largest part of its business, the sale marks a major strategic shift.
Therefore, the results of this division will be shown as discontinued operations in Emm-Serv’s income statement.

🔹 What’s Included in Income from Discontinued Operations

When reporting discontinued operations, companies include:

  1. Results of operations of the component
  2. Gain or loss from the sale
  3. Impairment loss (if the value drops)
  4. Subsequent increase in fair value (limited to previously recognized losses)

Example:
If a segment’s value falls below its carrying amount, a loss is recorded.
If it later increases in value, a gain can be recorded — but only up to the amount of the earlier loss.

🔹 When Are Discontinued Operations Reported?

Discontinued operations are reported in the period when the component is either:

  • Sold, or
  • Classified as held for sale

If the sale hasn’t occurred yet, the results of that segment are still shown under discontinued operations for as long as it remains held for sale.

Important: Once management decides to sell, depreciation and amortization stop — because those assets are no longer used for regular business operations.

🔹 Measurement and Valuation

A business classified as held for sale is valued at the lower of:

  • Its carrying (book) value, or
  • Its fair value minus costs to sell

“Costs to sell” include only the direct, incremental costs needed to complete the sale — such as legal or brokerage fees.

🔹 How to Present Discontinued Operations in the Income Statement

In financial statements:

  • Discontinued operations are shown as a separate line item, below continuing operations, and net of tax.
  • Any gain or loss from disposal can be shown directly on the income statement or disclosed in the notes to the financial statements.

🟩 Key Takeaways on Discontinued Operations

  • Represents a major strategic shift in business.
  • Reported separately in the income statement, net of tax.
  • No depreciation or amortization after the decision to sell.
  • Measured at the lower of carrying value or fair value minus selling costs.
  • Helps investors understand which parts of income are recurring (continuing) and which are one-time (discontinued).

✍️ Final Thought

Understanding income from discontinued operations is essential for analyzing a company’s performance.
It gives a clearer picture of what parts of the business are continuing, which are ending, and how these changes impact future profitability.

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