Should a loss on the sale of a business segment be included in operating income? I would’ve assumed it would be disclosed as part of discontinued operations but Schweser think otherwise…
It should be included in statement of other comprehensive income
Nope.
It goes at the bottom of the income statement, above net income, net of taxes.
Would we also add the loss back to net income to get CFO?
Yup: it’s not operations.
S2000magician, I was confused about this as well, but here’s what the CFA FR&A book has to say about this. This is sourced from page 169 of volume 3 of the curriculum, and I added the bold emphasis.
Under U.S. GAAP, which allow items to be shown as extraordinary, items that are unusual or infrequent—but not both—cannot be shown as extraordinary. Items that are unusual or infrequent are shown as part of a company’s continuing operations. For example, restructuring charges, such as costs to close plants and employee termination costs, are considered part of a company’s ordinary activities. As another example, gains and losses arising when a company sells an asset or part of a business, for more or less than its carrying value, are also disclosed separately on the income statement. These are not considered extraordinary under U.S. GAAP because such sales are considered ordinary business activities. So to me, it sounds Iike a sale of a part of a business would be part of continuing operations. However, on pages 167-168, the book talks about discontinued operations, and specifies that an operation that’s discontinued must be separable both physically and operationally. So, this still leaves me confused. If you’re told that a company sells a business segment, how would you make a decision on whether it’s physically and operationally separable in order to determine whether it’s operating income or discontinued operations?
Here’s a classified income statement:
Revenue
– Operating expenses (COGS, SG&A)
= Operating income
– Interest expense
+/– Other revenues and expenses
+/– Unusual _ or _ infrequent items
= Pretax earnings from continuing operations
– Income tax expense
= Income from continuing operations
+/– Income (loss) from discontinued operations (net of tax)
+/– Extraordinary items (net of tax)
= Net income