Income from Discountinued Operations

Income (or Loss) from Discontinued Operations is a line item on an income statement of a company below Income from Continuing Operations and before Net Income. It represents the after tax gain or loss on sale of a segment of business and the after tax effect of the operations of the discontinued segment for the period.

Income from discontinued operations is distinguished from income from continuing operations in order to communicate to users that the company has disposed-off assets that generated this much income and that only income from continuing operations should be expected to be earned next year unless the proceeds from disposal are used in more profitable way.

Discontinued operations are presented both under US GAAP and IFRS.

Example

Company C has income from continuing operations of USD 700 million. During the year it disposed-off one of its segments Segment A for USD 120 million. The segment earned revenue of USD 200 million and incurred costs of USD 150 million. Its book value was USD 100 million. Tax rate applicable to the company overall and the segment is 35%. Present net income for the period for the company.

Solution

Company C
Income Statement
For the Year Ended 31 December 2011
  millions
Income from Continuing Operations $700
Income from Discontinued Operations:  
Income from Operations of Segment A (net of tax)(0.65 × (200-150)) = 32.5 
Income from Disposal of Segment A (net of tax)(0.65 × (120-100)) = 13 
Net Effect of Income from Discontinued Operations 45.5
Net Income for the Period 739.5

Written by Obaidullah Jan, ACA, CFA