Lesson 10 - Intermediate Accounting Course 

10. Accounting for Discontinued Operations and Extraordinary Items

When analyzing a company’s financial statements, it’s important to distinguish between regular business activities and one-time or unusual events. Two key categories that help separate these are discontinued operations and extraordinary items. Understanding these ensures accurate financial analysis and prevents misleading interpretations of a company’s performance.

1. Discontinued Operations

A discontinued operation refers to a business segment or division that a company has sold, shut down, or decided to dispose of. This could be due to restructuring, poor performance, or a strategic shift.

✅ Why It Matters:

• Helps investors focus on the company’s core ongoing business.

• Prevents one-time sales or losses from distorting normal earnings trends.

• Reported separately on the income statement to avoid misleading comparisons.

🔎 How It’s Reported:

• Income or loss from the discontinued operation is reported separately from continuing operations.

• Any gains or losses on disposal (selling the segment) are also reported separately.

• These amounts are presented net of tax to show their true impact on earnings.

📌 Example:
Company XYZ sells its car manufacturing division to focus only on electric vehicles. The revenue and expenses from this division are removed from "continuing operations" and reported as "discontinued operations."

2. Extraordinary Items (No Longer Used in IFRS & GAAP)

Historically, extraordinary items were used to classify rare and unusual gains or losses, such as natural disasters, lawsuits, or major write-offs. However, accounting standards (IFRS & GAAP) eliminated this category to prevent misuse and earnings manipulation.

🚫 Why It Was Removed:

• Companies used it to hide losses by classifying regular expenses as "extraordinary."

• Instead, all unusual gains and losses must now be reported under normal operations or as a separate line item.

📌 Example (Before the Change):
A company that suffered massive damage due to an earthquake could report it as an extraordinary loss. Today, this would simply be included under "Other Expenses" instead.

Key Differences: Discontinued Operations vs. Other Unusual Items 

Final Thoughts

• Discontinued operations allow financial statements to reflect only ongoing business activities.

• Extraordinary items are no longer a separate category but must still be disclosed if they have a significant impact.

• Understanding these ensures investors and analysts don’t get misled by one-time events when evaluating a company’s true performance.