An accountant needs to gain an in-depth understanding of each client’s business operations, especially when it comes to the reporting of items such as discontinued operations. A discontinued operation is more than just the elimination of a model or series of items, it’s the sale, elimination, or removal of an entire product line, division, or subsidiary of a company.
You want to convey to your clients the importance of distinguishing discontinued operations from continuing operations because including the gains or losses from discontinued operations with continuing operations doesn’t give investors an accurate picture of the company’s profitability. If the discontinued operation is profitable, you overstate the profitability of continuing operations; if it loses money, you understate the profitability of continuing operations. Since most discontinued operations lose money, separating them on the income statement gives a more accurate reflection of continuing operations.
Under International Financial Reporting Standards (IFRS) used by Canadian accountants, a discontinued operation must satisfy two criteria:
- The asset must be disposed of or reported as held for sale.
- The asset or component must be a distinguishable area separate from the ongoing business.
Generally Accepted Accounting Principles (GAAP) used in the United States require that the asset be disposed or or held for sale, and that the business maintain no ongoing relationship with it. The primary difference between IFRS and GAAP is that under IFRS, the business may continue a relationship with the discontinued operation, while no interaction is permitted under GAAP.
In both cases, you record all profits, losses, and taxes associated with a discontinued operation as a separate item on the income statement. Standardized financial reporting usually places this information directly after the financial data for continuing operations.