Income from Discontinued Operations

Income statements should represent income from continuing operations and discontinue operations to give clear informations to the users of the financial statements. As a result, profit from discontinued operafion will not affect their decision making for the estimation of next year net income. The next year net income will be near about the net income from continuing operations of the current year unless and untill the net income from discontinuing operations is used in a constructive way to improve the performance of the entity.

Income (loss) is a line item in income operations but presented as a seperate section or block to avoid any sort of confusions in the mind of stakeholders.

Example # 1

Alpha industries net income for the year is $1400 millions. During the year, it disposed the one of its segment having a book value of $200 millions for $240 millions. The segment eanred a revenue of $400 millions by incurring cost of $300 millions. The applicable tax rate for the group as a whole is 35{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}.

Solution

Example # 2

PTX is a well known brand in poultry related products. It is in the business since 10 years. During the decade, it has launched several successful products which attracted high customer base. Analysts think that the success of PTX in the industry is due to the quality of the product and the taste its products have as compared to the competitors. PTX has state of the art machinery and infrastructure in place to properly washed the poultry meat and freezing facility which ensures the meat preserve its natural taste.

Since year, PTX is facing decline profit in one of its product Zeboti in the product group “Pizza Series”. The company tried its best to improve the sale of this product but could not be able to match the break-even point. As a result of increased losses for this specific product, PTX has decided to discontinue Zeboti. The management accountant is analyzing whether this should be treated as discontinued operation. But as the product belongs to the group, it cannot be disclosed as discontinued operations over the face of the financial statements because the income and cash flows of this individual product cannot be measured separately.

However, if the product Zeboti cash flows can be identified easily and accuracy, there would not be any issue in disclosing this as discontinued operations. But, in real world, this is not an easy task as products in a group share costs which cannot be traced to individual products.

However, if PTX decides to discontinue the whole product range in the group, then it can disclose this as discontinued operations over the face of the income statement. In the case of PTX, this is not a viable solution as this product range yields significant profit and cash flows to the business as a whole and could lead to loss of customers at a very large scale which may jeopardize the existence of the company in the market.