14. Financial Statement Analysis
Discontinued Operations and Extraordinary Items
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How are discontinued operations reported in a company's financial statements?
A
They are included within operating expenses on the income statement.
B
They are reported separately in the income statement, net of tax, after income from continuing operations.
C
They are disclosed only in the notes to the financial statements and not on the income statement.
D
They are combined with extraordinary items and reported as a single line item.
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Understand the concept of discontinued operations: Discontinued operations refer to parts of a company's business that have been sold, abandoned, or otherwise disposed of, and are no longer part of its ongoing operations.
Review the reporting requirements: According to accounting standards (e.g., IFRS or GAAP), discontinued operations must be reported separately in the financial statements to provide clarity to users about the company's ongoing and discontinued activities.
Locate the placement in the income statement: Discontinued operations are reported as a separate section in the income statement, typically after income from continuing operations. This ensures they are distinguished from the company's ongoing business activities.
Account for tax effects: Discontinued operations are reported net of tax, meaning the tax impact of the discontinued operations is included in the reported figure. This provides a more accurate representation of the financial impact.
Ensure proper disclosure: In addition to being reported on the income statement, details about discontinued operations are often disclosed in the notes to the financial statements. This includes information about the nature of the discontinued operations, reasons for discontinuation, and financial impact.
