Discontinued Operations: Classification, Accounting, and Financial Reporting

When a business discontinues a major part of its operations — whether through sale, abandonment, or shutdown — the accounting treatment must change to reflect this strategic shift.

Properly identifying and presenting discontinued operations is essential for providing clear financial information that distinguishes recurring results from nonrecurring events.

This article explains the definition, recognition criteria, financial statement presentation, and disclosure rules for discontinued operations under both IFRS and U.S. GAAP.

What Are Discontinued Operations?

A discontinued operation is a component of an entity that has either been:

• Disposed of, or

• Classified as held for sale,

and that:

1. Represents a separate major line of business or geographical area,

2. Is part of a single coordinated plan to dispose of such a business line or area, or

3. Is a subsidiary acquired exclusively with a view to resale

This definition applies under both:

• IFRS 5: Non-current Assets Held for Sale and Discontinued Operations

• ASC 205-20: Presentation of Financial Statements—Discontinued Operations

The key requirement is strategic significance — minor divestitures do not qualify.

Held for Sale Criteria

Before a component can be treated as a discontinued operation, it must meet the held for sale classification. According to IFRS 5 and U.S. GAAP, the following conditions must be met:

• Management committed to a plan to sell

• The component is available for immediate sale

• Sale is highly probable within 12 months

• An active program to locate a buyer is underway

• The asset is actively marketed

• Conditions for sale are expected to be met

Once these criteria are satisfied, the component’s assets and liabilities are measured and presented differently.

Measurement: Lower of Carrying Amount and Fair Value

Upon classification as held for sale:

• Non-current assets are measured at the lower of:

  • Carrying amount, or

  • Fair value less costs to sell

• Depreciation stops on assets held for sale

• If the fair value is lower, an impairment loss is recognized in the period

This ensures that the balance sheet reflects the recoverable amount of the assets to be disposed of.

Income Statement Presentation

The results of discontinued operations are shown separately in the income statement — below income from continuing operations.

The reported figure includes:

1. Post-tax profit or loss from the discontinued operation during the reporting period

2. Post-tax gain or loss on disposal (or impairment)

This single amount is clearly labeled as:

Profit (loss) from discontinued operations, net of tax

This separation enhances comparability by removing nonrecurring operations from core business results.

Example: Sale of a Subsidiary

A company sells its North American consumer products division, which qualifies as a separate major business line.

During the Year:

• Revenue: 25 million

• Operating expenses: 18 million

• Income tax: 2.1 million

Net profit from operations: 4.9 million

Upon Disposal:

• Gain on sale: 6 million

• Tax on gain: 1.5 million

Net gain on sale: 4.5 million

Total in Discontinued Operations Section:

Discontinued operations (net of tax) = 4.9 million + 4.5 million = 9.4 million

This amount appears separately from continuing operations in the income statement.

Balance Sheet Presentation

Once a component is classified as held for sale:

• Assets and liabilities of the discontinued component are shown separately, typically under:

  • Assets held for sale

  • Liabilities related to assets held for sale

These are not aggregated with other line items.

Disclosure Requirements

Entities must disclose in the notes:

• A description of the discontinued operation

• The facts and circumstances of the disposal

• The major line items comprising profit or loss

• Any impairment losses or reversals

• The gain or loss on disposal

Transparent disclosure ensures users understand the nature and impact of the discontinued activity.

Impact on Financial Analysis

Discontinued operations can significantly affect financial interpretation:

Aspect	Impact
Operating Margin	May improve, as low-margin segments are excluded
Profit Trends	Discontinued operations can distort comparisons
Cash Flow Analysis	Non-recurring inflows or outflows must be adjusted
Valuation Metrics (e.g. P/E)	Should be based on continuing operations only

Analysts and investors focus on continuing operations to evaluate the ongoing performance of a business.

Common Pitfalls

• Classifying too early or too late: the component must meet all held-for-sale criteria

• Failing to stop depreciation after classification

• Mixing continuing and discontinued results in disclosures

• Not separating major line items in the notes

• Reclassifying immaterial divestitures

IFRS vs. U.S. GAAP: Key Differences

Topic	IFRS (IFRS 5)	U.S. GAAP (ASC 205-20)
Timing of classification	At the point all held-for-sale criteria are met	Same
Scope	Includes subsidiaries held for sale	Excludes certain non-major segments
Depreciation after classification	Stops immediately	Stops immediately
Gain/loss recognition	Net of tax, reported in discontinued operations	Same
Disclosure requirements	High (specific line items disclosed in notes)	High (similar disclosure requirements)

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Discontinued operations are more than just divestitures — they represent strategic changes in a company’s direction.

• Once classified as held for sale, the component’s results are segregated from continuing operations

• The component is remeasured, depreciation stops, and any impairment is recognized

• Separate disclosure and clear presentation in the financial statements are required under both IFRS and U.S. GAAP

This classification provides stakeholders with a cleaner view of core performance while ensuring transparency around nonrecurring events.