Definition
Discontinued Operations refers to the components of a business or segments that are either being disposed of or have already been disposed of. It represents activities that do not form part of regular operations and aren’t expected to continue in the future. Earnings from Discontinued Operations are illustrated separately from continuing operations on a company’s income statement.
Phonetic
The phonetics of the keyword “Discontinued Operations” is: Discontinued – /ˌdɪskənˈtɪn.juːd/Operations – /ˌɑː.pəˈreɪ.ʃən.z/
Key Takeaways
Sure, here are three main takeaways regarding Discontinued Operations:“`html
- Discontinued Operations are parts of a company’s operations that have been sold, disposed off, or projected for sale. It can be any business line, subsidiary, or department of a company which is no longer in the continuing plans of the organization.
- The profit or loss from the discontinued operations, along with the gain or loss from the disposition, should be reported separately from the continuing operations in the financial statements. This kind of separate presentation helps investors to better forecast future cash flows and profits because it distinguishes between ongoing operations and operations that will no longer contribute to profitability.
- Accounting guidelines under the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require that the effects of discontinued operations be isolated and clearly shown in the company’s income statement to avoid distorting the financial analysis of a company’s regular, ongoing operations.
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Importance
The term “Discontinued Operations” is important in business and finance as it refers to specific segments or parts of a company that have been sold off, shut down, or otherwise disposed of, often affecting the company’s overall profitability and financial position. This information is necessary for investors, creditors, and potential stakeholders to accurately assess the financial health of a firm, understand its cash flow and profit generation, as well as identify any trends or recurring issues. Furthermore, it aids in making more accurate projections for future earnings and strategic decisions by separating the revenue and expenses of continuing operations from those that are no longer part of the company’s regular operational activities. Thus, it enhances transparency and clarity in financial reporting, aiding in a more precise interpretation of the company’s performance and providing a more complete picture of the company’s operations.
Explanation
Discontinued Operations refers to the components of a company’s businesses that have been sold, disposed of, or considered as held for sale. It is a crucial term not only from a business point of view but importantly from a financial perspective too. The main purpose of categorizing parts of the business as discontinued operations is to give a clear picture of continuing income sources to investors, financial analysts, and other stakeholders. Labeling these sections as discontinued operations differentiates the results of ongoing operations from the results of ones ceasing to exist in the future. This methodology helps in maintaining the transparency in financial reporting and enables investors to understand the company’s future prospects better.For instance, if a company decides to shut down one its key unit due to consistent underperformance, instead of mixing the financials of that particular unit with the company’s regular operations, it is reported separately as “Discontinued Operations”. This separate reporting helps stakeholders in understanding the core operational efficiency of the ongoing business. It offers a clearer, more accurate appraisal of a company’s financial health and profitability from its ongoing operations, irrespective of the financial impact caused by the discontinuing operation. So, discontinued operations reporting plays a vital role in reflecting a company’s true operational performance.
Examples
1. **Ford’s discontinued manufacturing operations in Australia (2016):** Ford, the auto manufacturing titan, made a strategic decision to discontinue its manufacturing operations in Australia in 2016, which had been running for over 90 years. This was due to unsustainable high production costs, high domestic competition and a challenging business environment in the region. This is a prime example of a discontinued operation, as Ford closed down a significant part of its business permanently.2. **Starbucks’ Teavana Stores (2017):** Starbucks announced in 2017 that it would be shutting down all 379 of its Teavana stores. At the time, the company said it made the decision after the Teavana stores consistently underperformed. This decision to close Teavana stores is considered a classic example of a discontinued operation as the company chose to focus on its primary coffee business.3. **HP’s Discontinued WebOS Devices Operation (2011):** HP decided to discontinue its WebOS devices operation, including the TouchPad and webOS phones, in 2011 due to poor sales performance and a strategic decision to focus on other areas of its business. This was a noteworthy example of a discontinued operation as HP effectively exited a business segment.
Frequently Asked Questions(FAQ)
What does the term ‘Discontinued Operations’ mean in finance?
Discontinued Operations refer to the parts of an organization’s business that have been sold, disposed of, or are pending disposal. They may be a department, line of business, or a subsidiary.
How is the revenue from Discontinued Operations reported in financial statements?
The revenue from Discontinued Operations is reported separately from the income of continuing operations on a company’s income statement. It is usually listed separately to ensure that investors and analysts get clear information about the company’s continuing profitability.
What is the significance of Discontinued Operations for Investors?
Financial information relating to discontinued operations is vital for investors because it helps them understand the possible future performance of the continuing operations of the company. Profit and loss from discontinued operations can significantly alter an organization’s net income.
Can a company have expenses related to Discontinued Operations?
Yes, a company can have expenses related to Discontinued Operations even after cessation or disposal. Some of these expenses might include legal or contractual obligations associated with the discontinuation process.
Is there a specific accounting standard that governs the disclosure of Discontinued Operations?
Yes, according to International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP), companies must adhere to specific guidelines while reporting Discontinued Operations. For instance, both under GAAP (ASC 205-20) and IFRS (IFRS 5), these operations should be separated from other business operations in financial reporting.
What type of business activities can be categorized under Discontinued Operations?
The activities that can be categorized under Discontinued Operations are those that can be clearly distinguished, operationally and financially, from the rest of an entity’s operations. For instance, the sale of a product line or the closure of a significant business segment can typically be classified as discontinued operations.
Related Finance Terms
- Corporate Restructuring
- Asset Liquidation
- Financial Reporting
- Net Income
- Operating Income
Sources for More Information
