Under FRS 102 an operation is discontinued only if it has actually been disposed of by the year end and it was a separate major line of business or geographical area, part of a single coordinated plan to dispose of one, or a subsidiary bought only to resell. Its results are then shown in a separate column of the profit and loss account, alongside continuing operations and a total, and the comparatives are restated. IFRS 5 uses the same definition but also catches operations classified as held for sale at the year end.
What counts as a discontinued operation?
The FRS 102 glossary defines a discontinued operation as a component of an entity that has been disposed of and:
- represented a separate major line of business or geographical area of operations;
- was part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or
- was a subsidiary acquired exclusively with a view to resale.
A component of an entity means operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. If the revenue, costs and assets of an activity cannot be separated in the books, it cannot be presented as discontinued.
The word major does most of the filtering. Closing one branch of a chain of 40 similar shops is unlikely to be a separate major line of business; leaving the retail market altogether to concentrate on wholesale probably is. Selling a group’s only overseas subsidiary may be a separate geographical area of operations. The judgement should be made against the business as a whole and explained if it is finely balanced.
Does the disposal have to be complete by the year end?
Under FRS 102, yes. The definition says has been disposed of, and paragraph 5.7F refers to operations discontinued by the end of the reporting period. Disposal is not limited to a sale: the glossary describes a disposal group as assets to be disposed of by sale or otherwise, so a closure that is complete by the year end can also qualify.
If the sale or closure happens after the year end, the operation is still continuing in those accounts. The decision is a non adjusting event, and paragraph 32.11(b) lists the announcement of a plan to discontinue an operation as an example that would generally be disclosed, together with the nature of the event and an estimate of its financial effect (paragraph 32.10). See events after the reporting period.
IFRS 5 paragraph 32 is wider: a component that either has been disposed of or is classified as held for sale at the year end can be a discontinued operation. Under paragraph 13, a group of assets to be abandoned is presented as discontinued from the date it ceases to be used. The held for sale tests are explained in assets held for sale under FRS 102 and IFRS 5.
How is it shown in the profit and loss account?
Paragraph 5.7E requires a single amount on the face of the income statement made up of the after tax profit or loss of discontinued operations plus the after tax gain or loss on impairment or disposal of the assets that made up the operation. It also requires a line by line analysis in a column identified as discontinued operations, separate from continuing operations, with a total column.
The columns exist because of company law. Paragraph A3.39 of FRS 102’s Appendix III, its note on legal requirements, explains that the format lets the business present the discontinued results as a single item while still showing the totals company law requires for turnover, profit before tax and tax.
Illustration only. A company sold its catering division in September. Its profit and loss account might look like this:
| £000 | Continuing | Discontinued | Total |
|---|---|---|---|
| Turnover | 4,000 | 900 | 4,900 |
| Cost of sales | (2,500) | (750) | (3,250) |
| Administrative expenses | (800) | (120) | (920) |
| Operating profit | 700 | 30 | 730 |
| Profit on disposal of division | Nil | 200 | 200 |
| Interest payable | (100) | Nil | (100) |
| Profit before tax | 600 | 230 | 830 |
| Tax | (150) | (10) | (160) |
| Profit for the year | 450 | 220 | 670 |
The £220,000 in the discontinued column is the single amount required by paragraph 5.7E. A reader can now see that the business that remains made £450,000.
What happens to last year’s figures?
Paragraph 5.7F requires the comparatives to be restated so that the analysis covers every operation discontinued by the end of the latest period. In the illustration, last year’s catering results move from continuing into the discontinued column, even though the division was trading normally then. Comparatives should be labelled as restated. IFRS 5 paragraph 34 has the same requirement.
Does this apply to small companies?
Paragraph 1A.7A says small entities using Section 1A are not required to comply with Section 5, so the columnar format is not mandatory for them. Paragraph 1A.5 still requires the accounts to give a true and fair view, and paragraph 1A.16 requires sufficient information in the notes to achieve that, so a small company that has sold a large part of its business should usually explain the effect in the notes. See FRS 102 Section 1A.
What else is triggered by a decision to discontinue?
- Impairment. Paragraph 27.9(f) lists plans to discontinue or restructure the operation to which an asset belongs as an indicator of impairment.
- Restructuring provisions. A provision for closure costs is only recognised when there is a legal or constructive obligation at the year end (paragraph 21.11D). Paragraph 21.11C requires a detailed formal plan and a valid expectation in those affected, created by starting to implement it or announcing its main features. Paragraph 21.11B bans provisions for future operating losses. See provisions and contingencies.
- Binding sale agreements. If contracts have been exchanged but completion is after the year end, paragraph 4.14 requires a description and the carrying amounts of the assets and liabilities involved.
How does IFRS treat it differently?
IFRS 5 paragraph 33 requires a single amount in the statement of comprehensive income, an analysis of revenue, expenses, profit before tax, tax and the disposal gain or loss, and the net operating, investing and financing cash flows of discontinued operations. Under IFRS the analysis may be in the notes. Under IFRS 18, which applies to annual periods beginning on or after 1 January 2027, paragraph 68 places these amounts in a separate discontinued operations category; see IFRS 18 presentation and disclosure.
FRS 101 removes the option to put the analysis in the notes. It must be shown on the face of the statement in a columnar format, because company law requires totals for turnover, profit before tax and tax.
What mistakes come up most often?
- Treating the closure of a minor product line or a single site as discontinued.
- Presenting an operation as discontinued under FRS 102 when the sale completes after the year end.
- Showing only the disposal gain separately and leaving the trading results in continuing operations.
- Failing to restate the prior year comparatives.
- Booking a provision for future trading losses of the operation being closed.
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Related Accountapedia entries
- When can a restructuring provision be made
- Exceptional items: when to show them separately
- Selling a subsidiary: the gain in group accounts
- Do small companies need a cash flow statement
- The statement of income and retained earnings
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- IFRS Foundation: Ifrs5
- IFRS Foundation: Ifrs18
- Financial Reporting Council: FRS 101 September 2024 lyJ0Tow
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.