Description of discontinued operations in accounting

May 4, 2014

Some business plans just don’t seem to pan out. Perhaps a product line underperforms or a subsidiary posts major losses due to a shift in consumer demand. Special rules apply whenever a company decides to sell off or otherwise dispose of a business segment.

1. When to use discontinued operation rules

U.S. GAAP provides a specific set of circumstances that must be met before a disposal of a business component is reported separately on the income statement. We won’t go into too much detail here, but arguably the most important event in the process is an official plan to dispose of the particular operation.

Another aspect that you should be aware of is that, once assets are considered “for sale”, they should not be depreciated or amortized. In other words, book values will stay the same until the assets are sold (assets can be impaired and written down, though).

2. Presentation of discontinued operation results

Once a business component is considered “for sale,” profits and losses from that component are moved to a separate part of the income statement after net income from continuing operations. Unlike regular net income, profits and losses from discontinued operations are reported net of tax. In other words, there is no separate line item for income tax expense or benefit under this section. As a brief example, if losses of a discontinued operation (a set of assets to be disposed of) total $1,000,000, and the tax rate is 30%, the income statement would show a net loss of $700,000 for this operation.

For the purposes of this article, you should also be aware of some timing rules. Results for the discontinued component are separately reported no matter when the plan to sell the component was finalized during the year. What that means is that, even if the assets were considered held for sale on December 1, results for the entire year would be reported in discontinued operation section of the income statement.

More detailed GAAP rules for discontinued operations cover reporting of impairment losses/gains and related disposal costs, but those rules are beyond the scope of this article.

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