What it means
When a company sells or shuts a distinct part of its business, the accounts split into two streams: continuing operations and discontinued operations. The point is comparability, because mixing them makes this year's profit impossible to compare with next year's.
For the reader of a set of accounts, the continuing operations line is usually the more useful number. It answers the question "what does this company earn from the business it will still own in twelve months?", which is the basis for any sensible forecast.
The split matters most in the year of a disposal, when discontinued results can include a large gain or loss on sale that has nothing to do with trading performance. A company that reports a big rise in total profit purely because it sold a division is not a company that has become more profitable.
Accounting standards set a fairly high bar for what counts as discontinued: usually a separate major line of business or geographical area of operations, either already disposed of or formally held for sale. Closing a single unprofitable store does not qualify, so its results stay inside continuing operations.
One nuance worth knowing is that prior year figures are restated so both years show the same continuing perimeter. That is why a comparative figure in this year's accounts can differ from the number the company published last year, which surprises readers who have not seen it before.
In practice
Real-world examples.
Example
A media group sells its printing division and reports continuing operations revenue of $310,000,000 against total group revenue of $420,000,000. Analysts build their forecasts on the $310,000,000 because that is the base the company will grow from next year.
Example
A food manufacturer classifies its loss-making frozen desserts business as held for sale and moves both this year's and last year's results into discontinued operations. Continuing operations margin jumps from 6% to 9%, not because anything improved but because the drag was removed.
Example
A telecoms operator closes fifteen retail stores but keeps the retail channel overall. Because the closures are not a separate major line of business, the costs stay inside continuing operations and simply appear as exceptional items.
Formula
Calculation
Profit from continuing operations = Total profit before tax - Profit before tax from discontinued operations, then less tax on the continuing portion.
An engineering group reports total profit before tax of $12,000,000, of which $2,500,000 came from a chemicals division that was sold in October. Profit before tax from continuing operations is $12,000,000 - $2,500,000 = $9,500,000. Applying a 25% tax rate gives tax of $2,375,000 and profit after tax from continuing operations of $9,500,000 - $2,375,000 = $7,125,000. Spread over 4,750,000 shares in issue, earnings per share from continuing operations is $7,125,000 / 4,750,000 = $1.50.Case study
Seen in the real world.
As an illustrative story, Kestrel Industrial Group is a fictional engineering business that spent two years trying to fix a chemicals division it had bought at the top of the cycle. In the year it finally sold the division, the group reported total profit before tax of $12,000,000, up sharply on the prior year, and the share price rose on the headline.
Reading further into the fictional accounts told a different story. The chemicals division contributed $2,500,000 of that profit before tax, largely from a gain on disposal, so continuing operations profit before tax was $9,500,000, giving $7,125,000 after tax at 25% and continuing earnings per share of $1.50.
Kestrel's chair used the annual report to draw attention to the continuing figure rather than the headline, on the basis that shareholders forecasting from a number that included a one-off disposal gain would be disappointed the following year. The illustrative point is that the more honest number is usually the smaller one.
Watch out
Common mistakes.
- Forecasting next year's profit from total reported profit rather than from continuing operations, which builds a disposal gain into the base.
- Assuming any closure or restructuring qualifies as discontinued, when the standards require a separate major line of business or geographical area.
- Comparing this year's continuing figure with last year's originally published total, instead of with the restated comparative in the same set of accounts.
Questions
People also ask.
Where do I find the split in an annual report?
The income statement shows continuing operations first, with a single line for discontinued results, and a dedicated note gives the detail.
Does the cash flow statement split the same way?
Cash flows from discontinued operations are disclosed separately, though the presentation is usually in a note rather than on the face of the statement.
Can a business move back from discontinued to continuing?
Yes, if a planned sale is abandoned the unit is reclassified back into continuing operations and prior periods are restated again.
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