What is Discontinued Operations?
509 reads · Last updated: December 5, 2024
In financial accounting, discontinued operations refer to parts of a company’s core business or product line that have been divested or shut down, and which are reported separately from continuing operations on the income statement.
Definition
In financial accounting, discontinued operations refer to a part of a company's core business or product line that has been divested or shut down, and is reported separately from continuing operations on the income statement. This classification helps investors and analysts better understand the company's current financial performance and future profitability.
Origin
The concept of discontinued operations originated in the late 20th century, as corporate restructuring and globalization trends intensified, leading more companies to divest non-core businesses. Both International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) have clear guidelines on reporting discontinued operations.
Categories and Features
Discontinued operations are typically categorized into two types: businesses held for sale and businesses that are terminated. Features include: 1) managed separately from the company's other operations; 2) presented separately in financial statements; 3) often involve significant transfer of assets and liabilities.
Case Studies
Case 1: In 2014, Hewlett-Packard announced the split of its enterprise services business, forming two separate companies, Hewlett Packard Enterprise (HPE) and HP Inc. This move was considered a discontinued operation due to the significant restructuring of core business. Case 2: In 2017, General Electric (GE) announced the sale of its lighting business to focus on its core industrial operations, classifying the lighting business as a discontinued operation.
Common Issues
Investors often misunderstand the financial impact of discontinued operations, assuming they have no effect on the company's future profitability. In reality, the divestiture of discontinued operations can affect cash flow and the balance sheet. Additionally, failure to correctly identify and report discontinued operations can lead to misleading financial statements.
