How are discontinued operations presented on the income statement?
I came across discontinued operations in my CFA Level I study and I'm confused about the presentation. When does a segment qualify as discontinued, and where exactly does it appear on the income statement? How should an analyst adjust their analysis for discontinued operations?
Discontinued operations represent a significant component of a business that has been disposed of or is classified as held for sale. The key principle is separation — results from discontinued operations are reported separately from continuing operations to give users a clearer picture of ongoing performance.
When does a component qualify as discontinued?
Under IFRS 5 and ASC 205-20, a component is classified as discontinued when it:
- Has been disposed of, or
- Is classified as held for sale (management is committed to a plan to sell, the component is available for immediate sale, and sale is probable within 12 months)
And the component represents:
- A separate major line of business, or
- A separate geographical area of operations, or
- A subsidiary acquired exclusively for resale
Income statement presentation:
The income statement is split into two distinct sections:
| Section | Content |
|---|---|
| Continuing Operations | Revenue, COGS, operating expenses, interest, tax — all from ongoing business |
| Discontinued Operations | A single line item (net of tax) showing the combined results of the discontinued component |
| Net Income | Total of both sections |
Example: Thornton Industries operates three divisions. In October 2026, it decides to sell its paper products division. For the full year:
| Item | Amount |
|---|---|
| Revenue from continuing operations | $42,000,000 |
| Expenses from continuing operations | ($35,000,000) |
| Tax on continuing operations (25%) | ($1,750,000) |
| Income from continuing operations | $5,250,000 |
| Discontinued operations (net of $375,000 tax): | |
| — Operating loss of paper division | ($1,200,000) |
| — Loss on measurement to fair value less costs to sell | ($800,000) |
| Loss from discontinued operations, net of tax | ($1,500,000) |
| Net income | $3,750,000 |
Notice the discontinued operations line is shown net of tax as a single amount, though the components (operating results and disposal gain/loss) may be disclosed in the notes.
Analytical implications:
- Analysts typically focus on income from continuing operations for forecasting because discontinued operations are non-recurring
- P/E ratios should use continuing earnings, not net income that includes discontinued items
- Cash flows from discontinued operations are also reported separately in the cash flow statement
Exam tip: If a CFA Level I question asks for the most appropriate earnings measure for valuation, choose income from continuing operations. Discontinued operations distort trend analysis.
Explore more income statement analysis in our CFA Level I course.
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