Report a Discontinued Operation

In order of a component of a company to be reported in discontinued operations, it has to either be (1) disposed or (2) classified as “held for sale.”

Steps to calculate a discontinued operation:

1. Impairment loss (BV – FV)
2. Gain/loss from operations (Held for sale – annual; Disposed – up to the sale)
3. Gain/loss from sale of discontinued operation
4. Net of tax 

Let’s Pretend – Your Story
During 2011, you decide to sell a component of your company, “Bees,” that was losing $100 per month. Its carrying value is $1000, and the fair value less costs to sell is $500. “Bees” sold for $800 on May 31, 2012. “Bees” is still losing $100 per month. Tax rate is 30% for both years. How do you record the disposal for 2011 and 2012?

Year 2011: 

1. Impairment loss = $1000 - $500 = $500
2. Gain/loss from operations = $100*12 = $1200
3. Tax from discontinued operations = ($500 + $1200)*30% = $510
4. Total loss from discontinued operations = ($500 + $1200) - $510 = $1190

Year 2012:

1. Gain/loss from operation: $100*5 = ($500)
2. Gain/loss from sale = $800 - $500 = $300
3. Total loss from discontinued operations (net of tax) = [$300 – ($500)]*(1 – 70%) = $140

Other things to remember:

• Whether or not the sale of an asset qualifies as a discontinued operation fully depends on the internal reporting of the company. If the cash flows and operating results are clearly distinguished, then it must be reported on the income statement as a discontinued operation.
• If comparative statements are presented and an item is classified a discontinued operation in the current fiscal year, prior year income statement will be rearranged to separate out the operations from the discontinued asset for comparison purposes (net income does not change).