How to Account for Discontinued Operations on an Income Statement

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A company's income statement summarizes the revenues, expenses and profits for an accounting period. A discontinued operation is a separate major business division or geographical operation that the company has disposed of or is holding for sale. Disclose the results from discontinued operations on the income statement or in accompanying notes. The two components of this disclosure are the profit or loss from the discontinued operations and the gain or loss from disposal.

Create a separate section titled "Discontinued operations" on the income statement. This should come after the continuing operations section, meaning below the "net income from continuing operations" line. The lines in this section may include "Gain or loss from discontinued operations, including disposal," "Income tax benefit or expense" and the tax-adjusted "Gain or loss from discontinued operations."

Calculate the profit or loss from the discontinued operation, which is equal to revenues minus expenses. Revenues include product and service sales, minus sales returns and allowances. Expenses include operating expenses, such as marketing and administration, and non-operating expenses, such as interest, taxes and unusual items. Show these calculations in the notes accompanying the income statement.

Determine the gain or loss from the disposition of the discontinued operation only if the disposal occurred within the accounting period. The gain or loss is the difference between the selling price and the fair-market value of the discontinued operation, minus transaction costs. The fair-market value of an asset is a reasonable estimate of its worth.

Add the profit or loss from the discontinued operation to the gain or loss on the disposal. Record this amount next to the "gains or losses from discontinued operations, including disposal" line.

Calculate the tax-adjusted gain or loss from discontinued operations. If you have a profit from discontinued operations, your taxes payable will increase; if you show a loss, your total taxes payable will decrease. For example, if the loss from discontinued operations is $100,000 and your tax rate is 30 percent, the applicable tax benefit is $30,000 ($100,000 x 0.30). Therefore, your taxes payable will fall by this amount. Therefore, the after-tax loss from discontinued operations is $70,000 ($100,000 - $30,000).

Tips

  • A discontinued operation may be a business that a company acquires with the intention of selling as soon as possible. The company may also dispose of a business unit as part of a coordinated restructuring plan involving other operating units.

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About the Author

Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.