What criteria must be met to classify a business segment as a discontinued operation, and how is it reported on the income statement?

Discontinued operations represent a component of an entity that has been disposed of or is classified as held for sale and constitutes a strategic shift in the company's operations. Both IFRS 5 and ASC 205-20 require separate presentation, but the qualifying criteria differ in important ways.\n\nUS GAAP (ASC 205-20) Criteria:\n\nA component qualifies as a discontinued operation when its disposal represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. Examples include:\n- Disposal of a major geographical area of operations\n- Disposal of a major line of business\n- Disposal of a major equity method investment\n\nIFRS 5 Criteria:\n\nIFRS 5 is more restrictive. A discontinued operation must be:\n- A separate major line of business or geographical area, OR\n- Part of a single coordinated plan to dispose of a separate major line or geographical area, OR\n- A subsidiary acquired exclusively with a view to resale\n\nIncome Statement Presentation:\n\n`mermaid\ngraph TD\n A[\"Income Statement\"] --> B[\"Revenue from Continuing Ops\"]\n B --> C[\"Expenses from Continuing Ops\"]\n C --> D[\"Income from Continuing Ops
(after tax)\"]\n D --> E[\"Discontinued Operations
(net of tax, single line)\"]\n E --> F[\"Net Income\"]\n E --> G[\"Components disclosed
in notes or on face\"]\n G --> H[\"Operating results of
discontinued segment\"]\n G --> I[\"Gain/loss on disposal
or remeasurement\"]\n`\n\nWorked Example:\n\nCortland Industries operates three divisions: aerospace ($180M revenue), chemicals ($95M revenue), and textiles ($42M revenue). In September 2026, Cortland's board approves a plan to sell the entire textile division.\n\nTextile division results for 2026:\n- Revenue: $42M\n- Operating expenses: $38M\n- Operating income: $4M\n- Tax at 25%: $1M\n- Net income from textile operations: $3M\n\nThe textile division is measured at the lower of carrying amount ($35M) and fair value less costs to sell ($31M), resulting in an impairment of $4M (pre-tax) or $3M after tax.\n\nIncome statement presentation:\n\n| Line Item | Amount |\n|---|---|\n| Income from continuing operations (after tax) | $52.0M |\n| Discontinued operations (net of tax): | |\n| Income from textile operations | $3.0M |\n| Loss on remeasurement to FVLCTS | ($3.0M) |\n| Total discontinued operations | $0.0M |\n| Net income | $52.0M |\n\nWhat Does NOT Qualify:\n- Closing a single retail store within a large chain\n- Discontinuing a product within a product line\n- Routine restructuring that does not represent a strategic shift\n- Selling a small subsidiary that is not a major component\n\nAnalyst Implications:\n- Focus on income from continuing operations for forecasting and valuation\n- Discontinued operations results are non-recurring and should be excluded from forward earnings models\n- Examine whether companies use the discontinued operations classification to manage reported earnings from continuing operations\n\nFor comprehensive income statement analysis, explore our CFA FRA course.