When a company decides to discontinue a segment of its business, it must account for the income or loss from that segment as a discontinued operation. Discontinued operations are reported separately in the income statement, and the amount is presented net of tax.
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To report income or loss from discontinued operations, a company must follow the following steps:
- Identify the discontinued operation: The first step is to identify the specific operation or segment of the business that is being discontinued. This could be a product line, a subsidiary, or a geographical location.
- Measure the assets and liabilities of the discontinued operation: The company must measure the assets and liabilities of the discontinued operation at their fair value less cost to sell. This means that the company estimates the amount it could receive for the assets if they were sold, less the costs associated with the sale.
- Determine the gain or loss from the sale: The company calculates the difference between the net proceeds from the sale of the assets and the carrying amount of the assets and liabilities. If the net proceeds are higher than the carrying amount, the company reports a gain from the discontinued operation. If the net proceeds are lower than the carrying amount, the company reports a loss.
- Calculate the income or loss from operations: The company must also calculate the income or loss from the discontinued operation for the current period. This includes all operating revenues and expenses associated with the discontinued operation.
- Report the income or loss from discontinued operations: The income or loss from the discontinued operation is reported separately in the income statement, after continuing operations but before extraordinary items and net income.
- Disclose additional information: The company must also disclose additional information about the discontinued operation, including the reasons for the discontinuation, the financial results of the operation for prior periods, and any significant changes to the estimated fair value less cost to sell.
Reporting income or loss from discontinued operations requires a company to identify the specific operation or segment that is being discontinued, measure the assets and liabilities of the discontinued operation, determine the gain or loss from the sale of the assets, calculate the income or loss from operations, report the income or loss from discontinued operations separately in the income statement, and disclose additional information about the discontinued operation. Properly reporting discontinued operations is important for investors and analysts to accurately assess a company’s financial performance and understand any significant changes in its business operations.