The financial accounting term discontinued operations refers to the separation of revenues and expenses associated with a component of a business that has either been disposed of, or is currently classified as held for sale.
Discontinued operations can include a subsidiary, line of business, product line, class of customer, or even a geographical operating area. When assessing the wellbeing of a business, the analyst or investor will examine the company’s financial statements, and attempt to determine if the same level of performance can be expected in the future.
To make such assessments meaningful, it’s important to separate the revenues and expenses associated with ongoing operations, typically referred to as continuing operations, from those of discontinued operations. This provides the analyst and investor with a clearer understanding of a company’s ability to generate profits in the future.
For this reason, a company’s income statement may be subdivided into two sections. The first will show a calculation of net income from continuing operations. The next section will include what are termed non-recurring events. Along with extraordinary items and effects of accounting changes, the impact of discontinued operations will appear in this section of the income statement.
Net income from continuing operations is then combined with the non-recurring events to determine the net income of the business.