Page 536 - Accounting Principles (A Business Perspective)

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A discontinued operation occurs when a business sells a segment (usually an unprofitable department or
division) to another company or abandons it. When a company discontinues a segment, it shows the relevant
information in a special section of the income statement immediately after income from continuing operations and

before extraordinary items. Two items of information appear:
• The income or loss (net of tax effect) from the segment's operations for the portion of the current year
before it was discontinued.
• The gain or loss (net of tax effect) on disposal of the segment.
To illustrate, Anson's sale of its Cosmetics Division on August 1 led to a before-tax loss of USD 500,000. The
after-tax loss was USD 500,000 X 60 per cent = USD 300,000. The operating loss before taxes through July 31 was
USD 2,000,000. The after-tax operating loss for that period was USD 2,000,000 X 60 per cent = USD 1,200,000.

Note this information on the income statement in Exhibit 104.
Prior to 1973, companies reported a gain or loss as an extraordinary item if it was either unusual in nature or
occurred infrequently. As a result, companies were inconsistent in the financial reporting of certain gains and
losses. This inconsistency led to the issuance of APB Opinion No. 30 (September 1973). Opinion No. 30 redefined
extraordinary items as those unusual in nature and occurring infrequently. Note that both conditions must be
met—unusual nature and infrequent occurrence. Accountants determine whether an item is unusual and infrequent
in light of the environment in which the company operates. Examples of extraordinary items include gains or losses
that are the direct result of a major catastrophe (a flood or hurricane where few have occurred before), a
confiscation of property by a foreign government, or a prohibition under a newly enacted law.

Extraordinary items are included in the determination of periodic net income, but are disclosed separately (net
of their tax effects) in the income statement below "Income from continuing operations". As shown in Exhibit 104,
Anson reported the extraordinary items after reporting the loss from discontinued operations.
Gains or losses related to ordinary business activities are not extraordinary items regardless of their size. For
example, material write-downs of uncollectible receivables, obsolete inventories, and intangible assets are not
extraordinary items. However, such items may be separately disclosed as part of income from continuing
operations.

2006 2005 2004 2003
Nature
Debt extinguishments 4 40 70 48
Other* 8 2 8 7
Total Extraordinary Items 12 42 78 55

Number of Companies
Presenting extraordinary items 12 42 78 55
Not presenting extraordinary items 588 588 522 545
Total Companies 600 600 600 600
*For the current year, the nature of
the other items included casualty
losses and gains from asset
disposals.
Exhibit 105: Extraordinary items
In Exhibit 105, note that in a sample of 600 companies for the years 2000-2003, most companies do not report
extraordinary items.

Accounting Principles: A Business Perspective 537 A Global Text